Things are terrible in Portugal, but not quite as terrible as they were a couple of years ago. The same thing can be said about the European economy as a whole. This is good news.
The bad news is that eight years after what was supposed to be a temporary financial crisis, economic weakness just goes on and on, with no end in sight. And that’s something that should worry everyone, in Europe and beyond, news outlets reported.
First, the positives: the eurozone—the group of 19 countries that have adopted a common currency—posted decent growth in the first quarter. In fact, for once it was better than growth in the US.
Europe’s economy is, finally, slightly bigger than it was before the financial crisis, and unemployment has come down from more than 12% in 2013 to a bit over 10%. And there is no end in sight to its chronic underperformance.
Insulin of Cheap Money
When long-term interest rates on safe assets are very low, that’s an indication that investors don’t see a strong recovery on the horizon. German five-year bonds currently yield minus-0.3%; in fact, yields are negative out to eight years.
Recently Narayana Kocherlakota, the former president of the Minneapolis Fed, offered a brilliant analogy over incredibly low interest rates. Responding to critics of easy money who denounce low rates as “artificial”—because economies shouldn’t need to keep rates this low—he suggested that "we compare low interest rates to the insulin injections that diabetics must take".
Such injections aren’t part of a normal lifestyle, and may have bad side-effects, but they’re necessary to manage the symptoms of a chronic disease.
In the case of Europe, the chronic disease is persistent weakness in spending, which gives the continent’s economy a persistent deflationary bias even when, like now, it’s having a relatively good few months. The insulin of cheap money helps fight that weakness, even if it doesn’t provide a cure.
But while monetary injections have helped to contain Europe’s woes—one shudders to think of how badly things might have gone without the leadership of Mario Draghi, president of the European Central Bank—they haven’t produced anything that looks like a cure. In particular, despite the bank’s efforts, underlying inflation in Europe seems stuck far below the official target of 2%.
Unemployment in much of Europe is still at levels that are inflicting huge human, social and political damage. It’s notable that in Spain youth unemployment is still an incredible 45%.
No Cure?
There is nothing in reserve to deal with a fresh shock. Suppose that Greece blows up again, or the British public votes to leave the European Union, or China’s economy goes off a cliff, or whatever. What could or would European policymakers do to offset the blow? Nobody seems to have any idea.
The thing is, it’s not hard to see what Europe should be doing to help cure its chronic disease. The case for more public spending, especially in Germany—but also in France, which is in much better fiscal shape than its own leaders seem to realize—is overwhelming.
But doing the right thing seems to be politically out of the question. Far from showing any willingness to change course, German politicians are sniping constantly at the central bank, the only major European institution that seems to have a clue about what is going on.
But at the moment it’s hard to see any positive signs.
