Eurozone’s central bank leadership prepares for shoddier prospects

It has become commonplace to state that the European economy still doesn’t fare well after six years of recession or practical stagnation. For good reasons however in the past few days the horizon looked particularly darkened. Negative statistical evidence and meandering statements by key people are indicative of that. Inflation or rather disinflation statistics, persistently high unemployment rates and critical views expressed by important decision makers, all point to a rather bleak perspective. Let’s take one thing at a time. The latest case of an indirect recognition of the difficult future was a statement by Sabine Lautenschlaeger, a member of ECB’s Executive Board and Vice-Chair of the central bank’s Single Supervisory Mechanism, which supervises the banking industry of Eurozone. In view of ECB’s President Mario Draghi’s remark last March that he did not foresee more interest rates cuts, Lautenschlaeger said “…there are other instruments of monetary policy still available”. She said that at an event in Lucerne, Switzerland. But talking about more monetary easing may enunciate the failure of the so far applied policies, and this could mean grave trouble. More monetary easing? Why should such a statement by a European Central Bank dignitary hide fear or anguish about the future? The answer is simply that what Lautenschlaeger said is a clear show off of more available monetary policy instruments, against potential difficulties that may soon arise. There is no need to talk about available armaments in your arsenal, if there is no enemy in sight. Understandably, the enemy around the corner is the possible inability of the European economy, to profit from the zero or too close to zero interest rates, which now prevail in the euro area. Last month, the ECB cut down its main refinancing rate to a straight 0.0%, prompting certain market segments in the euro area to push interest rates below the zero line. For centuries now, all and every economic theory considers the cost of money as the main factor determining the course of economic activities. Needless to say that low cost money is a great growth factor, while the opposite is true when the money costs dear to real economy investors and consumers. Can Eurozone react? What then if the money costs nothing and yet the economy doesn’t respond positively with noticeable growth? The obvious answer is that there is something wrong with the economy or our brave new world. Mind you, that the Bank of Japan has unsuccessfully used even negative real interest rates to revitalize the country’s dormant economy. Draghi however has clarified that he doesn’t consider further cuts of ECB’s basic interest rate, meaning that negative nominal main refinancing interest rate is out of the question. In such a case, the ECB would have suffered principal losses. Then what if the European economy cannot profit from the zero interest rates? At that point enters Lautenschlaeger reassuring everybody, that there are more monetary policy instruments to stimulate the stagnating euro area. But this is a bitter consolation to the millions of the unemployed. Probably only the bankers would appreciate more relaxed quantitative easing measures. More bad news There is more bad news though. Last week Eurostat, the EU statistical service found that in “euro area (EA19) the seasonally-adjusted unemployment rate was 10.2% in March 2016, down from 10.4% in February 2016 and from 11.2% in March 2015”. Despite this marginal fall of unemployment in March by less than a percentage unit, in comparison with last year, the fact remains that the rate of people without a job remains in the double digit area. Obviously, the pace of unemployment decrease is torturously slow. The rise of the extreme right political parties stands as witness that the EU societies cannot stand these unemployment levels. Last week also, Eurostat estimated that the euro area annual inflation rate fell again below the surface breathing line in April at -0.2%. No need to stress what negative inflation means for the economy and the perils it may entail. According to the same source though, the GDP growth remained in the positive area during the first quarter of this year, with a 0.6% increase in relation to the previous period. Nevertheless, it seems beyond reasonable doubt that this too low growth rate perfectly explains the reality of the tortuously slow fall of the unemployment rate. In conclusion, the Eurozone economy remains in the precarious area for the sixth year in a row, without a clear ability to attain a sustainable growth path that can bring about noticeable positive effects on employment. Not to forget, that real unemployment rates are double than the official ones, and the voters know this painful reality very well and express their feelings in the ballot box.