As Portugal basked in the first taste of summer, the world’s financial brains were thrashing it out in the leafy splendour of Penha Longa – a VIP golf resort less than 40 minutes from the centre of Lisbon. On the agenda was the increasingly urgent question: what to do next to kick-start Europe’s “sluggish recovery” and tackle horrific jobless rates, particularly among the young?
Two months since European Central Bank boss Mario Draghi announced his controversial bond-buying programme ploughing billions into eurozone economies to try and stimulate economic growth, does the plan show any signs of working?
That was the bottom line issue at the ECB’s second Forum on Central Banking in the noble Sintra hills, far from the madding crowd scrabbling to earn a crust in the gathering heat.
The truth is that despite the ECB’s massive cash injection of €60 billion a month, along with rock bottom interest rates, economic growth is still very much an ugly word. It is just not happening the way the experts intended.
In fact, as many as 19 member states that use the shared currency “are still struggling to get past a crisis over too much government debt”, while unemployment remains “stubbornly high”.
Set against problems like Greece declaring it cannot pay its upcoming tranche of debt to the IMF and the UK forging ahead for an in-out referendum, the top-heavy European Union is looking more than ever like a wobbly Portuguese Molotov.
“Governments must get busy”
The Associated Press (AP) report on the conference by business writer David McHugh has been repeated throughout the world’s media and shows clearly how central banks set out to take the lead, expecting governments to follow.
McHugh writes that Draghi claimed: “The ECB can’t do it all.”
Governments “have to introduce pro-business reforms” that Draghi affirmed would “unleash an untapped potential for substantially higher output, employment and welfare”.
He “avoided most details” of these possible reforms, added McHugh, but “such measures could include things like reducing the paperwork to start a business”, “less restrictive rules governing hiring and firing” and “reducing the gap in legal protections between established workers who are hard to lay off and younger workers who remain stuck with short-term contracts at low wages”.
It all sounds simple, but as his section entitled “Let’s not forget democracy” explained “several economists challenged Draghi’s pressure on governments, saying non-elected central bankers had no business making political proposals”.
Paul de Grauwe from the London School of Economics and a former member of the Belgian parliament said the central bank was putting its legitimacy at risk, adding that restrictions on layoffs existed “because people want them”.
“And when a central bank then comes out and says we should do structural reforms, it really says we should break down this system of (government) protections,” de Grauwe continued. “In doing so the central bank sets itself outside the democratic process.
“The danger is that people will reject such a central bank,” he added.
Or, as we have seen consistently in Portugal, judges will block structural forms on the basis of that they are unconstitutional.
Thus to a large extent last week’s conference was a lot of hot air in a country that is something of a powder keg right now.
Pre-election steam is building up nicely, with a good share of corruption investigations still on the boil.
Elsewhere, France’s foreign minister Michel Sapin was in Lisbon over the weekend in talks with Portugal’s finance minister Maria Luís Albuquerque.
Banging the same old drum, that Portugal “had come a long way but still had to keep up the pressure”, Sapin alluded to “improved global growth in the eurozone”, so he had possibly not been one of the economists thrashing it out at Penha Longa.
One who was was Richard Baldwin who told Lusa after the get-together that with public debt still at 130% of GDP, Portugal could be plunged into yet another recession if interest rates rose to just “2 or 3%”.
Thus as US Treasury Secretary Larry Summers told the experts, “there is very much a risk of complacency and premature declaration of victory with respect to the European periphery”.
With 19 countries already tackling “too much government debt”, the European periphery is now much larger than the Community’s “core”… and even that’s not doing so well.
By NATASHA DONN [email protected]
Photo: Banking protests: Never stuck for a good venue to take their protests, the association of indignant and misled commercial paper holders – made up of thousands who lost life savings in the BES carve-up – donned masks depicting ECB boss Mario Draghi and Governor of the Bank of Portugal Carlos Costa as they demonstrated outside the meeting of world economists in Penha Longa, Sintra last week.
Photo by: STEVEN GOVERNO/LUSA
