THE Eurozone’s stuttering recovery needed the slowdown of China and related emerging markets like a hole in the head. The Greek imbroglio was still hanging like a gigantic cloud over its prospects anyway. But the headwinds out of the East are severe enough for European Central Bank president Mario Draghi to raise the prospect of more quantitative easing (QE) in the single currency zone in the face of the resulting global economic and stock market tremors.
This would be no mean development. Mainland Europe was late to the QE economic stimulus party, mainly because the Germans did not want it (unsurprising, with memories of Weimar Republic hyperinflation part of the national psyche). The Bank of England and US Federal Reserve pressed the QE button years ago during the financial crisis and recession. The ECB, eventually worn down by worries about persistent stagnation, only acted earlier this year.
Draghi obviously now feels fire might have to be fought with fire, however. He says the weakening of the Chinese economy could throw the Eurozone into problems in two ways: through a diminished demand for European exports to China and a destabilising effect on financial markets.
The ECB president used uncompromising language last week, saying the bank was ready to extend the “size, composition and duration” of its €1.1 trillion bond-buying programme.
It briefly provided some backbone for stock markets and comes as the ECB has downgraded its quarterly projections for inflation and growth. They were only set in the middle of August, so it shows the exponential speed at which the China syndrome of falling GDP and stock market volatility has changed the European picture.
Paris and Berlin have not fully recovered their composure since the Chinese shocked everybody by devaluing the renminbi last month, the equivalent in the staid world of central banking of crying fire in a crowded cinema.
The US Federal Reserve is doing a sort of whistling in the dark shtick about still not having given up on the idea of raising American interest rates for the first time in nearly a decade; but you sense its heart is not really in it while the Chinese turmoil continues. Ditto the Bank of England. Regarding the flight of capital from emerging markets, we may not have seen the endgame yet.
Both Britain and the US are much farther along the path of recovery than the Eurozone. We and the Americans can afford to suggest our economies are strong enough to withstand interest rate rises, even if there are private doubts and the judgment is extremely finely balanced.
But Draghi is operating in a different magnitude of uncertainty in the Eurozone.
As such, it is no surprise that the ECB’s bond-buying programme is definitely here for another year at least. «