Reasons to be Cheerful? Quantitative Easing Comes to Frankfurt

Reasons to be Cheerful? Quantitative Easing Comes to Frankfurt

On Thursday, in a long rumoured move, European Central Bank President Mario Draghi launched a programme of quantitative easing, announcing the monthly purchase of €60 billion worth of assets, including government covered bonds and asset-backed securities. Bond buying will begin in March and last until the end of September 2016, a point by which Draghi insists inflation will be around two percent.

Draghi’s announcement brings the ECB closely into line with the United States’ Federal Reserve and Britain’s Bank of England, having previously relied upon long-term refinancing operations. However, the decision has not been met with universal approval. German members of the bank’s 25-strong governing council have voiced their concerns as too have the German press. Leading tabloid Bild warned that the euro could be “dramatically devalued” with the introduction of QE and “crisis hit countries such as Spain, Greece, Italy and France” may shy away from much needed reforms as a result. Meanwhile Angela Merkel privately commented that the programme would be unworkable and saddle German taxpayers with unnecessary debts. Chancellor Merkel’s comments illustrate the sharp divides between Berlin and Paris, with President Francois Hollande praising the action as “add(ing) significant liquidity to the European economy.”

When the Fed’s QE programme came to a halt last September more than $4 trillion had been poured into the bond market, helping to stave off immediate economic collapse. However, while round one was widely heralded as a success, round two was reported to have added just 0.13 percent to the annual rate of economic growth: rate which, if replicated in the Eurozone, would be viewed as derisory. More difficult to calculate is the confidence that QE can give banks, businesses and consumers alike, encouraging them to take out loans, expand and spend.

Morgan Stanley have predicted that confidence will be a major beneficiary. QE is predicted to push interest rates down, easing the credit stranglehold affecting southern Europe in particular. The euro’s value is also seen as likely fall, helping to attract external investment and increasing the total volume of exports.

However, driving down the euro is not without risk. It is already at an eleven year low against the dollar and the threat of currency war – perhaps from Japan, the principal rival to European automobile manufacturers – should not be overlooked. Furthermore, while American non-financial corporations receive less than half their funding from banks, in the Eurozone around 85 percent of capital is derived from these sources. If QE is slow to filter through financial institutions, its impact may arrive too late to correct the current myriad of backlogs.

Quantitative easing remains a controversial area and certainly one that is not without risks. While the Fed’s program can be seen as quiet success, the challenges and conditions faced by Frankfurt today are not the same as those viewed from Wall Street or Washington in 2008 and there is no guarantee that a similar outcome can be achieved. However, some action is clearly required if the Eurozone is to stay remain. With confidence, liquidity and, indeed, ambition low, a blue chip program of financial cooperation could well be an important, perhaps even decisive, step along the road to recovery.

High Growth, Low Skills and No Vision: Why Have Labour Struggled to Capitalise on Economic Dislocation?

Research carried out by the Centre on Skills, Knowledge and Organisational Performance and Oxford University has revealed the changing structure of occupations and jobs across the developed world over the past two decades, and suggested that the labour market increasingly resembles an hour glass. While the number of high skilled jobs has undoubtedly risen, there has been a hollowing out of mid-level positions and the growth of low skilled jobs, particularly in the service sector.

In the UK specifically, it is estimated that low skilled occupations have increased by a larger share than high skilled ones, with five of the former being created for every four of the former. Underpinning this phenomenon has been the emergence of a wide gap between the supply of and demand for highly skilled labour, indeed, the ratio now stands at 9:4. In turn wages, at the lower end of the employment spectrum in particular, have become suppressed.

These findings are not surprising and have undoubtedly been magnified in recent years. Since the Coalition Government came to power in 2010 net employment has risen by around three quarters of a million, with the private sector creating approximately 1.2 million jobs. However, between 2010 and 2014 real wages fell at an average rate of 2.2 percent per annum.

Such statistics lend support to Labour’s suggestion that a “cost of living crisis” has engulfed Britain on David Cameron’s watch, an assertion that has received support from sources as diverse as the Church of England and Governor of the Bank of England, Mark Carney, who warned that persistently low wages could saddle households with long term debts and delay economic recovery. However, Labour have been singularly unable to convert this message into a decisive electoral advantage. Indeed their poll lead, as high as ten points in 2012, has dwindled and they now appear to be neck and neck with the Tories.

An obvious reason for this has been Ed Miliband’s indecisive leadership. At Prime Minister’s Questions, Miliband has routinely failed to land blows on David Cameron and a series of high profile gaffes have led many to question his competence. More fundamental, however, has been the failure of Douglas Alexander’s ’35 percent strategy’ and a lack of a long term strategic vision: there has been no clarion call to Jerusalem and no promise of a New Britain. Labour have focused on diagnosing the difficulties faced by the public, but struggled to articulate how they would help to solve them.

In turn, they have lost swathes of Scottish voters to the SNP and struggled to capitalise on the Liberal Democrats’ national capitulation. Though backbenchers have scoffed at the notion of ‘woolly’ metropolitans drifting to the Greens, these are votes that in previous elections may well have gone to Labour and which could, in marginal constituencies, prove to be decisive.

In an interview this week retiring MP Peter Hain suggested that Labour needed to be “more radical” and offer an equality programme based on his study Back to the Future of Socialism. While this retreat into the past, Hain’s an obvious nod to the work of Tony Crosland, may be comforting for some on the party’s intellectual left it could well prove as damaging as inaction and see them lose much needed support from the political centre.

Although something of a pariah to many within Labour circles, it is worth remembering that Tony Blair led the party to its greatest victory by moving beyond the rhetoric of right and left, while still maintaining a progressive foothold. With Conservative positioning long entrenched it seems that Labour’s insistence on looking to the past, rather than shaping the future, could well cost them at the ballot box.

Jack Taylor

Jack Taylor

Consultant at Keene Communications
Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.
Jack Taylor

About the Author

Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.