Mario Draghi's opening remarks at his regular news conferences are getting repetitive to the point of tedium. The European Central Bank President typically winds them down with a plea for euro zone governments to get off their Armani-clad butts and launch measures to boost competitiveness, employment and growth.
He did so again on Thursday, insisting that the "implementation of structural reforms, in particular, needs to be substantially stepped up." In other words, there is only so much the ECB can do to fix the mess feckless governments and regulators and runaway capitalism have created. Finance, industry and labour ministers, backed by their parliaments, have to get in the game if Europe's economic-zombie status is to end and the populist tide reversed.
The central irony of the central banker's remarks is that his quantitative-easing (QE) program can take a least some of the blame for the slow growth, and QE is not going away any time soon. The ECB is extending it by nine months from its scheduled wind-down date, to the end of 2017, even if it will be reducing monthly financial-asset purchases (mostly government bonds) to €60-billion ($83.3-billion) a month from €80-billion starting in April.
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By this time next year, the ECB will have spent €2.3-trillion buying bonds and other assets in its relentless effort to stimulate the economy and inflation. Here's betting it won't end next December. Mr. Draghi said QE could be throttled back up if he doesn't like the inflation numbers a year from now.
By now, it's well recognized that QE is an imperfect economic-revival tool, even if it has been widely used, and praised, in the United States, Britain, Japan (its inventor) and, now, the euro zone.
QE is imperfect because there is little doubt that it makes the wealthy wealthier – even Bank of England Governor Mark Carney says so – because the assets whose values get inflated by QE's cheap-money tsunami, such as bonds and real estate, are mostly owned by the wealthy.
But could central bankers, through their lavish stimulus programs, be stoking populism, too? Some economists, among them Manulife's Megan Greene, think they do. Her theory is that the rise and fall of populism tends to follow the rise and fall of business cycles.
In essence, central banks, thanks to their stimulus measures, are eliminating the traditional up-down business cycle. The downturns are becoming less sharp, but so are the upturns, meaning the hefty job creation that can come with V-shaped recoveries is absent. "The normal repricing of capital, labour and materials involved in a typical business cycle would be so painful in this recovery that central banks keep stepping in to avoid it," Ms. Greene said. "As a result, this business cycle has been extra long and populists have had a long runway to consolidate their support."
The ECB is a case in point. Six years after the financial crisis, the euro zone's growth and inflation numbers are still lamentable – even if they are moving in the right direction. In 2016, inflation will come in at 0.2 per cent and growth is forecast to dip slightly to 1.6 per cent next year from this year's 1.7 per cent. Real domestic demand was 1.1 per cent lower in the second quarter of 2016 than it was in the first quarter of 2008.
Politicians adore QE, whose euro zone edition started in March, 2015. With Mr. Draghi at their backs, they don't have to do all the heavy lifting. But their support will come at a cost. Economic reforms are not being pursued or are being pursued without enthusiasm. Growth remains tepid, as does job creation. While European Union unemployment is coming down, it's still almost 10 per cent. Youth unemployment, at 20.7 per cent in October, remains atrocious. In the Mediterranean region, youth unemployment is 35 per cent or higher. In Sicily, it's 56 per cent.
No wonder populist parties such as Italy's Five Star Movement (M5S), which could form the next government, are on the upswing in Europe. In Sunday's Italian referendum on constitutional change, 81 per cent of the country's youth – almost half of whom don't have jobs – voted No, as Five Star had urged. The No vote ended the career of Matteo Renzi, the centre-left Prime Minister who had campaigned on the Yes side. "If the Italian government does not implement real reforms to boost the economy, it will just provide a tailwind for the M5S in the next election," Ms. Greene said.
At least one politician in Europe seems to understand the euro zone's ultraloose monetary policies may be doing as much harm as good and is making life easier for the populist parties, most of which are anti-EU, anti-euro or both, and some of which are anti-immigrant to the point of rabid xenophobia. That politician is Wolfgang Schaeuble, the all-powerful German Finance Minister.
Last spring, he pinned half of the blame for the rise of the populist, anti-immigrant Alternative for Germany party on the ECB and its stimulus programs. "I said to Mario Draghi … 'Be very proud. You can attribute 50 per cent of the results of a party that seems to be new and successful in Germany to the love of this policy,'" he told an audience.
While he didn't go into details, German savers are upset that the ultralow and even negative interest rates in the euro zone are wrecking the returns on their savings. If Mr. Schaeuble is right, QE and the other stimulus measures are also wrecking any incentive for the economic reforms that are required for strong growth, fuelling the populist parties. Maybe Mr. Draghi did the euro zone no favours by extending QE this week and essentially making it open-ended. The endless money gusher means his pleas for reforms can be ignored.
Eric Reguly