Lately, there has been a feeling that the European Central Bank (ECB) is trying to cover up and deny that the economy is doing reasonably well in the eurozone. Board members of the bank often start their lectures or interviews by reporting that things are getting better, but immediately after there is a comment that there is a good chance that growth will slow down.
We also see this forced pessimism in their language about monetary policy in the future. They keep mentioning that the bank can extend and expand the purchase of government and corporate bonds, and that interest rates will remain low for a long time. No ECB director ever says that the purchasing program can be shortened and reduced or that we should take into account that interest rates will rise in the near future.
This self-flagellation is now starting to become bizarre. If we look at how things are going economically, we quickly see that the eurozone has not been doing wrong lately. It will come as a surprise to many, but it is simply true: the eurozone is beating the US economically. And in the US, the central bank is raising interest rates – the purchase of government bonds was stopped long ago – because the economy is improving.
Just take a look. For at least two years, the eurozone economy has been growing by between 1 and 2 percent per quarter. The economy has been growing quarter after quarter for almost four years. That is simply not bad. Economic growth has certainly been higher than economic growth in the US every quarter since the fourth quarter of 2015, about which we often read positive stories.
There are euro countries that are even surpassing the US in terms of economic growth. In Spain and Slovakia, for example, the economy has grown by between 2015 and 3 percent every quarter since autumn 4. By comparison, growth in the US over the same period was between 1,3 and 1,9 percent. Public debt in the eurozone is lower than in the US and has been declining for some time, while in the US it is rising further.
So the fact is that we in the eurozone are doing better when it comes to the economy. Unemployment has been falling for years and has recently fallen below the psychological limit of 10 percent. Business and consumer confidence has risen rapidly and is at the highest level since the start of the crisis. But it is not just about the increase, the score clearly indicates that companies are investing more and want to invest more, so that economic growth is not based on quicksand. This is certainly the case as domestic demand is climbing.
All this while a political-economic earthquake has occurred, namely that an EU country is leaving the Union for the first time. We also see this good development in banks' lending to companies and households, a crucial variable in our debt-driven economies. For the first time in years, more loans are being granted. The above is of course partly due to the low interest rates of the ECB. But instead of shouting from the rooftops that things are finally going well and gently pointing out that the US is doing worse - yes, that's allowed! – all we hear from the ECB people is that there are all kinds of dangers lurking and that we have to take into account that the bank will further relax policy, something you do when the economy is deteriorating.
Of course, this does not mean that there are no problems. I wish it was true. Greece is still in a coma and there is a danger that Italy, with its sky-high debt, low growth and banking sector that is simply rotten, will follow the country. Economic reforms leave much to be desired in almost all euro countries. And yet, despite all that, we are doing better than the US.
Why then does the ECB emphasize the dangers again and again and go to great lengths to avoid talking too much about the good developments? I suspect because the bank cannot acknowledge that things are going well. After all, if the ECB were to become more optimistic, it would mean that the bank would actually have to stop buying government and corporate bonds at the rate of 80 billion euros per month (about 35.000 euros per second!) and, like the Fed in the US, interest rates should increase.
But in that case, many euro countries would be in big trouble. Their interest costs would explode, the extra interest bill would increase by tens of billions of euros per year. Even Germany would then have major problems. The Institute for Economic Research, an economic think tank, has calculated that one percentage point increase in interest rates for Germany would result in an additional interest bill of 21 billion euros per year.
This is a result of the fact that the euro countries have significantly increased their debts since the start of the crisis. The ECB apparently has no backbone to ignore this and to tailor its monetary policy to the economic situation. The result: expect the ECB to continue to downplay the economic situation in the euro zone and that interest rates in the euro zone will remain very low for a long time. This is also not an environment in which the euro can be expected to become stronger