Mario Draghi, the urbane boss of the European Central Bank, is about to print hundreds of billions of euros to rescue the faltering continental economy. The City expects him to launch his financial bazooka, otherwise known as quantitative easing (QE), on Thursday after the central bank governing council’s monthly meeting.
His hand was forced last week by events in Zurich, where his Swiss counterpart said the policy of pegging the franc to the euro was no longer tenable. The markets were impatient for QE, the Swiss central bank chief said – they have already waited months for a decision.
The ECB funds will begin to flow six years after the world’s other major economies adopted QE. The US has spent around $4 trillion, the UK £375bn, and last year the Japanese promised to spend almost $700bn a year, up from $560bn in 2013.
If Draghi goes ahead, the Super-Mario headlines will proliferate across Europe and gigabytes of the web will be devoted to analysing the consequences of the move for the 19-member currency zone – and for its trading partners, such as the UK.
The ECB’s aim is to flood the eurozone banking system with money to boost lending after a collapse in the value of consumer and business borrowing. Draghi’s supporters say the very fact of taking action will increase confidence and invigorate a stuttering economic bloc. According to this argument, Brussels has done little apart from impose austerity. Now, with the ECB throwing its weight behind a strategy for growth, confidence and spending will begin to rise.
QE has clearly played a big part in rescuing the global economic system after the crash. But its usefulness as a spur for growth is less clear. As Labour’s Ed Balls has said, governments need to step in with their own funds – albeit borrowed – for investment that ensures growth is sustainable.
QE is like an adrenalin shot to revive a stricken patient. It is useless when the patient is in recovery and crying out for something more substantial.
But persistently printing vast quantities of a currency has one major effect. It drives down its value against other currencies. Since Christmas, the yen has been trading 50% below where it was in October 2012 against the dollar. That means Japanese exports of cars, TVs and kimonos cost 50% less in the US and, just as importantly, in China, which has pegged the renminbi to the dollar.
So could the eurozone revive its fortunes on the back of higher exports should, say, €1tn of QE drive down the euro’s value?
It’s unlikely. This kind of currency warfare is usually short-lived and, for that reason, dismissed by corporations that are looking to make long-term investments.
Take the UK’s experiment after the financial crash. A mixture of QE and economic weakness triggered a 25% fall in the pound against the dollar and the euro. The Bank of England was among many institutions to naively expect a surge in exports. It never arrived. The low pound persisted for three years before much of the value recovered on the back of home-grown demand. The UK still has a lopsided recovery that relies on consumer spending while business investment and exports remain weak.
Japan’s prime minister, Shinzo Abe, says he recognises the problem and is using a temporary fall in the yen only to ease the pain while fundamental reforms to labour laws and business protections take effect.
Draghi serves 19 masters who cannot agree on reforms. So after delivering the QE shot in the arm, it’s not clear what he can do next. Germany’s finance minister, Wolfgang Schäuble, is not the only senior politician to lobby against QE, saying it will be ineffectual. And with opposition from such powerful figures, it looks like QE will prove to be a one-off that causes huge volatility on the currency exchanges but does little to change the eurozone’s long-term prospects.
Oil companies can take a little pain
Politicians find it much easier to look backwards than forwards –except perhaps when a general election heaves into view. They have all grown up with a significant fossil fuel industry and many find it a reassuring presence in the growing new world of renewable power.
Hence the kneejerk reaction that has sent ministers from Westminster and Edinburgh rushing to Aberdeen to assure the oil and gas industry that they feel its pain and will find ways to help.
No one wants to see jobs being shed anywhere, and a 60% drop in the oil price over a six-month period will be a “negative shock” to the Scottish economy, as Bank of England governor Mark Carney pointed out. But he also pointed out that the North Sea’s pain is the wider economy’s gain – and anyway many others will ask whether a hydrocarbon sector should be “saved” when the UK needs to wean itself off fossil fuels because of near-runaway global warming.
Oil industry demands for huge tax cuts to stop a number of North Sea fields being shut down are scare-mongering. The oil price is quite likely to recover within 12 or 18 months, and the government still needs to work out what role fossil fuels will play in a wider move to a low-carbon economy.
The oil and gas industry filled its steel-capped boots with cash as the oil price was racing along at over $100 for the past three years. And yet instead of investing in new technologies, where costs are falling and markets growing – or even concentrating on lower-carbon gas – the oil majors have often just moved into increasingly environmentally damaging and costly locations, like the Arctic, in search of yet more oil.
There will be a role for fossil fuels in the coming decades but it must be a much more limited one if the rise in the world temperature is to be kept to 2C. Now, 11 months before a critical United Nations climate change conference in Paris, is not the time for politicians to look backwards and thoughtlessly throw money at oil.
Morrisons too quick to form firing squad?
Morrisons chief executive Dalton Philipscorrect was fired last week when the Bradford-based chain proved to be the real turkey in the supermarket sector over Christmas, with sales down 3.1% in the six weeks to 4 January.
But maybe the supermarket’s incoming chairman Andy Higginson was a little hasty. Data released on Friday by research group Nielsen, covering a shorter period, suggested Morrisons performed better than its rivals.
Philips had clearly made a trolley-load of mistakes: losing millions on online childrenswear retailer Kiddicare; going upmarket, then slashing prices; opening stores in the wrong places.
But his eventual strategy of price cuts, new technology and online shopping was the right one – and the man who fired him agrees. Philips is staying in charge until March while Higginson searches for a replacement. Why Higginson – an ex-Tesco executive – isn’t taking the reins himself in the interim is not entirely clear.