Good news for the euro(-zone)
Well, well, well. What a great couple of weeks it has been for the euro and the eurozone. Beyond my wildest dreams and expectations. And no, that is not meant ironically. Nor is it British humour.
What? Hasn't it been an economic disaster, with the dramatic fall in the euro's value, the massive printing of money by the European Central Bank (ECB) and the victory by a radical left-wing party in Greece?
Well, if that's your view, you're entitled to it. And in the spirit of free speech, I will naturally support your right to express it. But if I were to share your view, then, well...we'd both be wrong.
Let's look at the three elements in more detail:
- It is only the external value of the euro that has fallen dramatically, both against the dollar and, more recently, against the Swiss franc. Internally, within the eurozone, the euro's value is stable because there is no inflation. Indeed, prices are falling slightly. Also, the depreciation in the euro's external value was long overdue, because the euro had been seriously overvalued, particularly against the dollar. I have been predicting the euro's fall for years — and hoping for it, despite the fact that it makes my overseas holidays more expensive. The fall will give a boost to eurozone exports and the economy more generally.
- The announcement on 22 January by the European Central Bank (ECB) of full-scale quantitative easing (QE) — the creation of new money through the purchase of government bonds — was also very welcome. And, like the euro's fall, QE (or "Q€") was long overdue. The ECB's job is to keep eurozone inflation at just under two per cent a year. The current rate is -0.2 per cent, which is why the ECB's expansionary monetary action — creating €1.14 trillion of new money between now and September 2016 — is both justified and necessary. It's just a shame that it didn't come earlier, as it did in the UK and US.
- I also regard the victory by the left-wing anti-austerity party Syriza in Sunday's Greek elections as a boon for the eurozone. The fiction that Greece will ever pay back all its debts needed to be exposed and reality accepted via some face-saving solution. And neither the Greek nor the eurozone economy will recover significantly without an easing of the austerity (restrictive fiscal policies) of recent years. As ECB boss Mario Draghi made clear last year, governments need to support growth through more expansionary fiscal policies, particularly in Germany. Also, if the euro falls a little further as a result of Syriza's victory, I regard that as positive, too. But I don't expect a serious crisis in the financial markets in the coming days and weeks.
As a result of these three events, I am more optimistic about the eurozone's prospects than I have been for years.
Much drivel will be spouted — and already has been — about how the fall in the euro's external value, the printing of money by the ECB, and Syriza's victory will lead to hyperinflation, a new financial crisis and, no doubt, the end of civilization. Again, if that's your view, fine. Just don't expect me to share your unwarranted and unhealthy pessimism.
Indeed, I believe that January 2015 will be seen as the moment the eurozone finally began its recovery. Wanna bet?
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