Its now nearly 2 years since the head of the European Central Bank (ECB) said he “was ready to do whatever it takes” to save the euro, and brought down interest rates in the weakest PIIGS economies (Portugal, Ireland, Italy, Greece, Spain). As the chart shows, this statement had a remarkable effect in financial markets:
- Interest rates today (green column) for the PIIGS are far lower than at their peak in 2012 (blue)
- And rates in 4 of the 5 PIIGS are lower than before the 2008 financial crisis began (red)
The reason for this remarkable turnaround is not hard to find:
- Investors believe that Germany will be happy to pick up the bills for the problems in the PIIGS
- This, of course, is wishful thinking – Germany will not, and cannot, afford the cost involved
- Thus in reality the potential break-up of the Eurozone has only been delayed by the ECB’s bluff, but not avoided
Even more worrying is that the impact of the lower rates is not not even being felt amongst businesses in the PIIGS. As the blog noted last September, lending in the PIIGS has been sharply reduced. And as the New York Times reported last week, the banks in countries such as Portugal simply don’t want to lend. As a result, interest rates for even a small €100k loan ($138k) are now at an unaffordable 10% level.
Thus although the ECB claims its policies have “worked”, they have not solved the two core problems of the European economy:
- Unemployment in the Eurozone remains at 12%, whilst almost 1 in 5 young people under 25 are unemployed
- Pension age is still around 65, even though life expectancy has now reached 80 in most countries
The end result is that economic growth is far below its potential, slipping back in Q1 to just 0.2%.
Equally disturbing is the failure of the major political parties to address these core issues in this week’s EU-wide elections. As a result, voters are disillusioned, and turning to alternative anti-EU parties in record numbers.
Greece, the initial cause of the Eurozone crisis, presents a particularly worrying example. A year ago, the blog worried that the financial crisis had led to 90% cuts in the supply of pharmaceuticals. Now the Financial Times reports that Greece’s neo-Nazi Golden Dawn party is winning votes and credibility by becoming a major provider of medical services, replacing the collapsed state system.
This is just one example of way in which Europe’s social stability is being undermined by the focus on monetary policy. It is wishful thinking to imagine that today’s lower interest rates in the PIIGS are a sign of economic recovery.
But politicians prefer to hide behind the veil of monetary policy. They refuse to show leadership as this would mean addressing the real questions about jobs, pension promises and medial services that matter to ordinary people.
The result is that fringe parties such as UKIP in the UK, the National Front in France, Golden Dawn in Greece and many others are filling the gap.
The result is that this week’s Euro elections will probably show at least 20%-25% support for the anti-EU parties. It could well be higher. And contrary to consensus opinion, these parties will not then allow ‘business as usual’ to continue in the European Parliament. Why should they, when their purpose is to destroy the EU?
It is not yet too late to change the direction of travel. Europeans are desperate for real political leadership, and for leaders who are prepared to have an honest dialogue about the hard choices that now have to be made.
Hopefully Sunday’s election results will act as a wake-up call to centre politicians. The majority of Europeans do not want to see parties such as Golden Dawn in power.
But desperate times can create desperate outcomes, as we saw in the 1930′s.