As we consider our future economic relationship with the EU, beware the stagnant eurozone

As we consider our future economic relationship with the EU, beware the stagnant eurozone

Procedure, rather than policy, is dominating political discussion at the moment. At their conference this week, the Labour Party demonstrated more interest in internal divisions (rather than creating an electoral platform), the right of the Government to prorogue Parliament has been brought up for review by the Supreme Court and the Prime Minister has been denied his desired election by the poorly-conceived Fixed-term Parliaments Act.

With so much navel-gazing, it is easy to miss the fact that Europe’s economy is once again returning to stagnation and decline, a situation which is perpetuated by its political structure.

This month, the European Central Bank (ECB) has substantially cut its forecast for growth in the Eurozone, also lowering the inflation forecast next year from 1.4% to 1.0%. These changes equate to big impacts on European growth and fatally undermine the narrative of recovery being propagated by Brussels.

That this is itself a substantial economic failure is of little doubt, given the ECB’s mandate to keep inflation running at a stable 2%. In response, the ECB lowered deposit rates further into negative territory, signalling that interest rates would stay lower for longer than it had previously guided. Most dramatically, they committed to buying €20 billion of bonds every month from November. In Europe, Quantitative Easing is back with a bang.

European economic weakness has been a feature of the landscape for nearly a decade – but it has not always been thus. At the turn of the millennium, the European establishment was aggressively pushing its economic model. European banks were expanding their balance sheets to unprecedented levels, seeking to muscle their way to scale in an industry dominated by the big American investment banks and backed by a supportive bureaucracy in Brussels. Corporates were perusing big deals, with overall deal-making over the 5-year period 2003-2007 reaching €5.2 trillion, according to the Institute for Mergers, Acquisitions and Alliances. This was a colossal bet on European influence spreading. Backing this empire-building was an economy reliably ticking over: inflation was stable, growth was steady and the sovereign debt burden (apparently) manageable. Calls grew for us all to follow the new, collaborative economic infrastructure being instituted in the name of ‘ever-closer union’.

That Panglossian outlook has since been thoroughly discredited. Following a recession which knocked 4.1% off European GDP in 2009 and sent unemployment in major economies like Spain soaring over 25%, corporate Europe has struggled to recover with any of the verve of its American counterparts. For instance, $1 invested a decade ago in the American S&P 500 would now be worth $3.31 but €1 in the EuroStoxx 50 would be worth just €1.46. Moreover, European banks like Deutsche Bank are retreating, chastened and embarrassed, from the world stage. The corporate ambition has faded, replaced with a survivalist mentality which in 2018 retreated nearly 30% from 2007 highs. Far from validating the economic model, it has lurched from crisis to crisis.

What saved the euro during the crisis was not fast-paced action by political leaders, but a vast and unprecedented purchase of sovereign and corporate debt by the ECB. The effect of this was to allow individual countries and companies to issue debt at reasonable prices, surviving the worst of the economic trauma. Without fundamental fiscal reform, by liberalising, decentralising, and generally letting free markets flourish, this debt-buying was more akin to bailing out the boat while leaving the leak unplugged.

The lack of true reform has now come full circle, and the EU once again finds itself in the doldrums. Germany, the strong man of Europe, is facing industrial (if not yet actual) recession. Unemployment remains persistently, perniciously high in Spain and the periphery, while France is led by a man more interested in his own vainglorious legacy as a father of European integration than true economic reforms.

It is no accident that history is repeating itself now with ECB stimulus. The consensus-driven, procedure-obsessed EU has shown it is unable and unwilling to effect any continent-wide fiscal or regulatory reform, seemingly content to let unelected individuals, such as Competition Commissioner Margrethe Vestager, take the headlines in the absence of meaningful progress.

In the UK, the current preoccupation with the mechanics of Brexit will soon once again be replaced with conversations about policy. Our negotiations with the EU over the future economic relationship are likely to take many years to resolve. It is vital that now, with so many politicians and leaders still trying to take us back into the EU’s economic arrangements (either via a customs union or Single Market arrangement or via a revocation of Article 50), we must remember the costs of the EU’s economic failures, and the opportunities that await outside its influence.