Mario Draghi, the president of the European Central Bank, was not all gloom and doom on Thursday, though the man has every right to be given this week’s dismal stream of economic data.
Only the day before the ECB’s monthly rate-setting meeting, the European Commission dropped its estimates for euro zone growth to a mere 0.1 per cent next year, against its previous forecast for 1 per cent growth, and said that Germany, Europe’s economic powerhouse, will expand by only 0.8 per cent. German factory orders and industrial production are falling alarmingly fast. And the economies of Spain and Greece continue to sink, with the chances of a Spanish bailout rising by the day as the jobless rate climbs and growth remains deep in negative territory.
Yet in response to a question during the press conference about the euro zone’s ability to emerge from its vat of mud, he seemed surprisingly optimistic, which made some of us wonder whether he had been infected by Barack Obama’s cheery victory speech, which made Americans think that ambition, fairness and hard work would make anything possible.
Certainly the worst is over, he said, for the euro zone as a whole and its 17 member countries. “I would not have made this statement a year ago,” he said. “Both have a fundamental position which is way more balanced than the U.S. but also other countries – Japan and the UK . The euro has a current account balance, which is basically in balance, corporate debt and household debt is relatively low all over the euro area, savings ratios are high, unit labour costs are down.”
All true. Indeed, taken as a whole, the 17-country euro zone does not look bad on paper, compared to the United States, where debt is exploding because annual budget deficits are monstrously high. The American deficit last year was $1.3-trillion (U.S.) and spending will exceed revenues by at least $1.2-trillion this year.
Mr. Draghi went on. “The fiscal consolidation that has taken place all over the euro areas is amazing...So debt to GDP levels are on their way down everywhere.”
The point being, he said, is that “this basically poises the euro area for a recovery which probably will be gradual, but will also be solid.”
Mr. Draghi seemed to forget about Greece in his analysis. Its debt to GDP is rising relentlessly in spite of two bailouts and a big, fat debt haircut delivered to private owners of Greek sovereign bonds. As its economy enters it sixth year of grinding recession, Greek debt is expected to reach 189 per cent of GDP next year. That’s a crushing, unsustainable debt load; Spain’s, by comparison, is about half that level and the country is struggling. Greece’s exodus from the euro zone is still possible, in spite of Mr. Draghi’s endless assurances that the euro is “irreversible.”
Mr. Draghi, by the way, left interest rates unchanged. This, in its own strange way, also seemed a vote of confidence in the euro zone. If the economy were about to fall off a cliff, he would no doubt have shaved off a quarter point. It also appears that he wants to give the ECB’s bond-buying program some time to work.
The program would buy sovereign bonds in the secondary market while the European Stability Mechanism, the new €500-billion bailout fund, would do the same in the primary market. Neither the ECB nor the ESM has spent a cent on bond purchases under this new program; its mere existence has brought down bond yields in Spain and Italy.
Mr. Draghi’s relatively cheery appraisal of the euro zone’s collective finances was clearly designed to encourage the troops – the millions of unemployed workers who are beginning to see no future as overall growth remains flat. All he has to do now is pray that Greece doesn’t bolt for the euro zone door and reprint drachmas in an effort to devalue its way to prosperity. If that were to happen, Portugal and Spain might do the same and Mr. Draghi’s vision of a slow but solid recovery would go up in flames.