Massive Stimulus Won’t Prevent a Eurozone Slowdown
Massive Stimulus Won’t Prevent a Eurozone Slowdown by Daniel Lacalle for Mises
The European Central Bank balance sheet has risen to 53.9 percent of GDP in July 2020. This compares to the 32 percent of the Federal Reserve and 33 percent of the Bank of England. This means a €1.78 trillion increase year to date. Furthermore, excess liquidity has soared to €2.9 trillion, a €1.2 trillion increase since January.
Added to this unprecedented monetary stimulus, the eurozone has included a record high 10 percent of GDP in various fiscal stimulus programs. None of it has prevented the economy from showing signs of slowing down in August.
After a strong bounce in May and June, coming from the reopening of most economies and the base effect, high frequency data compiled by Bloomberg Economics shows an evident slowdown in July and August. All economists who follow the eurozone economy are warning about the worrying weakening of leading indicators. The Organisation for Economic Co-operation and Development (OECD) has also published its July 2020 Leading Indicator Index, which shows that economies like Spain are not just showing signs of weaker growth, but contraction. Italy continues to improve but at a slow pace, while France and Germany post declining growth levels.
The reason is evident. All the eurozone monster stimulus is focused on perpetuating bloated government budgets and incentivizing noneconomic return or subsidized spending. The entire European Recovery Fund is clearly aimed at promoting white elephants disguised as green projects, but what is more concerning is that the eurozone Green Deal includes more taxes and measures to prevent demand growth than productivity-enhancing plans.
This lesson should have been learnt in 2009. The European Union launched its massive Growth and Jobs Plan, which rose to more than 1.5 percent of the EU GDP, and the economy did not improve, while more than 4.5 million jobs were lost.
The problem of these massive stimuli is that they benefit the wrong parts of the economy. Multinationals and national champions that did not have any problem accessing markets in the past are taking advantage of current government spending in entitlements and subsidies and the massive private bond purchases and liquidity injections.