The European Union (EU) is evidently relishing its richly earned recent political reprieve from the risk of a far-right backlash in the Dutch parliamentary and French presidential elections. Also adding to the overall sense of relief are factors that reflect the health of the 19-nation eurozone, whose economies are hemmed in by a common monetary policy despite their disparate fiscal and macro-economic arrangements.
The sovereign debt crisis has largely receded. There has been a steady rise in gross domestic product in the first quarter of 2017 — the growth outstripping that of the U.K. and the U.S. And that is not all. The current 9.5% rate of unemployment, the lowest since the onset of the financial crisis, is projected by the European Central Bank (ECB) to drop to 8.9% next year and to 8.4% in 2019.
Yet, the improved economic and political climate has already revived a contentious debate on the trajectory of a closer eurozone integration. The ECB is currently facing criticism from the more prosperous economies of Germany and the Netherlands over its decision to continue with both the quantitative easing (QE) programme and sub-zero interest rate policy. These ultra-loose monetary tools were deployed to reassure investors of the bloc’s financial firepower amidst a sovereign debt crisis.
Germany’s resistance
The signs of a recovery have prompted Jens Weidmann, president of Germany’s Bundesbank and a vocal hawk in the ECB’s governing council, to counter the prescription for negative rates in view of their impact on the profitability of banks. Germany and the Netherlands share concerns on the erosion of pension funds, owing to the current meagre levy of 0.4% on private reserves held by national central banks.
Such resistance is reminiscent of the sustained attacks the Frankfurt-based institution had come under in the wake of the eurozone’s banking and debt crises earlier in the decade. The burden of the argument then was that the bank was overstepping its monetary policy mandate of keeping inflation below but close to 2% of gross domestic product. The new orientation amounted, in their view, to an intrusion into the fiscal terrain of determining the flow of money supply by governments.
Mario Draghi, president of the ECB, has claimed the creation of over four million eurozone jobs in the past three years as among the successes of its monetary policies. He is equally categorical that a rollback of QE and negative interest rates too soon would amount to unplugging the growth engine.
On a sobering note, an ECB study points to persistently low wages among eurozone workers owing to high levels of underemployment. As much as 15-18% of the workforce is said to be either jobless or keen to put in longer hours. This figure is nearly twice the size of the official unemployment numbers and is even higher in weaker labour markets, with consequences for wage negotiations. A combination of under-employment and low wages thus puts into jeopardy the eurozone’s current efforts to counteract deflation. By implication, negative rates of interest may not be dismantled soon.
