September 3, 2014

Pressure on European Central Bank grows as economic recovery founders

Europe's recovery is in danger. Governments are under pressure to save it but struggling with political obstacles and disagreement among themselves over what to do.

Instead, the region is pinning its hopes — once again — on the European Central Bank, which is expected to begin new stimulus measures if the economy gets any worse.

Europe's lack of growth is looming larger and larger, however, and the ECB says it can't save the economy alone.

For more than five years since the eurozone hit turbulence over too much debt in 2009, governments' answer has been to raise taxes and restrain spending. And there's been some progress. Deficits have shrunk, and countries that needed bailout loans are slowly getting their act together.

But second quarter growth was zero, after only four quarters of measly expansion. While unemployment in the United States has fallen to 6.2 percent from 10 percent at its peak in October 2009, Europe's is at 11.5 percent — still near last summer' 12 percent. The risk is Europe remains stagnant for years — bad news not just for its people but its three major trading partners: the United States, Britain and China.

As worries spread, the debate over austerity versus growth is sharpening again. EU leaders will meet Oct. 6 to discuss growth, and the ECB will hold a policy meeting on Thursday at which it is expected to flag its willingness to announce more stimulus such as bond purchases.

ECB President Mario Draghi is ringing the alarm.

He says the central bank can't do it all alone and that governments should dial back austerity, within EU rules aimed at restraining deficits. “It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this,” Draghi said in a speech last week. Government spending can help boost growth by providing demand when the private sector is struggling.

Draghi's not the budget boss, however. Each of the eurozone's 18 member governments decides its own spending. Germany, Europe's biggest economic and political power, and Chancellor Angela Merkel are sticking with the emphasis on austerity. Countries with extremely high debt, such as Italy, are under pressure to keep the lid on spending.

Draghi urged countries to be smart in cutting their budgets — for instance, to spare spending on long-term investment that helps growth in future years, and not to just rely on growth-killing tax increases.

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