ECB gives a figleaf for politicians to hide behind

Economic growth

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FTIt is impossible to overstate the seriousness of today’s threat from deflation.  Policymakers refuse to accept that demographic change can create an economic impact.  Instead, they want to believe that increasing debt can somehow stimulate growth.

The Financial Times has kindly headlined the blog’s letter on this subject as its lead letter.

June 10, 2014 12:35 am

From Mr Paul Hodges.

Sir, Deflation clearly represents a serious threat to an over-indebted eurozone economy. But the European Central Bank’s (ECB) latest response is unlikely to prove more successful than in the past (“Price projections force ECB’s hand”, June 6).

 The reason is it fails to tackle the core problem. Germany’s pension age today is lower that it was 125 years ago, when Chancellor Otto von Bismarck introduced the world’s first state pension scheme in 1889. Yet German life expectancy has risen since then from 47 to 80 years. The result, according to the OECD, is more than one in three of Germany’s working age population is above pension age. And the same pattern is repeated across the eurozone.

Consumption is 60 per cent of European GDP. And so a growing army of pensioners creates obvious headwinds for growth. They lack the income to stimulate demand themselves, while the spending power of the younger generation is reduced by the need to help pay for their parents’ pensions.

It is wishful thinking to imagine that Europe’s demographic deficit, created by 50 years of declining birth rates and rising life expectancy, can now be resolved by negative interest rates or the electronic printing of banknotes.

Most worrying is that the ECB’s high profile provides a figleaf behind which politicians can hide. It allows them to continue to avoid the necessary debate with voters about the need for an immediate rise in the pension age to a more realistic level.

But at this late stage, no other options exist. If the ECB does not step back, we risk ending up instead with the worst of all possible worlds – deflation plus rising levels of unrepayable debt.

Paul Hodges, Chairman, International eChem, London N7, UK

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