European Central Bank In Panic Mode as Economy Stalls

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The eurozone could not borrow from the momentum of the U.S. economy in the third quarter as economic growth slumped to a tepid 0.2% , the slowest rate in more than four years. With the 19-nation currency bloc beginning to stagnate, and the heavyweights failing to post significant gains, Brussels is in panic mode, likely leaning on the European Central Bank (ECB) for further stimulus.

Economists originally anticipated growth of 0.4%. But global trade woes, tumbling business confidence, Italian distress, and the gradual dissipation of an accommodative monetary policy all contributed to the poor numbers in the July-September period.

Italy fell into stagnation, failing to record any growth. Rome has been contending with a debt crisis, sending the yield (interest rates) on government bond prices higher. Officials are embroiled in a contentious battle with the EU because their borrowing plans violate the trade bloc’s rules. There is now talk of a Keynesian-style fiscal stimulus to rev up the national economy.

France, which endured a terrible first half, reported a 0.4% increase, lower than the market forecast of 0.5%. The economy gained on surging business investment, household consumption, and net trade. While the figures are commendable, French Finance Minister Bruno Le Maire did not help matters when he suggested that the eurozone is not prepared to contain a new financial crisis, adding that “it is in no one’s interest that Italy be in difficulty.”

Germany, the economic engine of the eurozone, will not publish its Q3 numbers until mid-November. But the Bundesbank has warned that growth might have flat-lined in the previous quarter. Researchers do predict a recovery for Berlin in the final quarter of 2018, driven by a resurgence in the automobile sector and falling unemployment.

The data sent the euro plunging to an intraday low against the greenback.

What Happened?

ECB Out of Bullets

The Centre for Economics and Business Research (CEBR) says that the risk of a global recession by 2020 has jumped from one-fifth in 2017 to one-third this year.

Since the Great Recession, Mario Draghi and the ECB have tried to spur growth through quantitative easing (QE), the act of buying government securities from the market to decrease rates and introduce new money into the economy. With record low rates and hundreds of billions of new euros in the market, Keynesians would expect a rallying economy. But growth has been subdued.

A recession is inevitable – both in the United States and in Europe. Unlike the last economic contraction, the ECB will be out of bullets, unless it wants to experience rampant inflation and a currency crisis. European nations are deeply in debt, running budget deficits and witnessing putrid results. There isn’t much left for these bloc members to do, except employ pro-market measures, like rolling back aggressive spending efforts, paying off the debt, and cutting taxes.

Draghi and Co. have only exacerbated the eurozone’s problems by adopting easy-money, inflationary policies. Now that it has fired all the big guns to barely achieve 2% quarterly growth, the ECB is out of bullets, unable to do anything more. Governments can only raise the white flag of surrender and propose their own secession from the currency bloc. To save yourself from drowning on this sinking ship, an exit from the eurozone may be the only reasonable solution.

Full article: European Central Bank In Panic Mode as Economy Stalls (Mises Institute)

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