Want to understand what's happening in the eurozone? Then think back a couple of years to the early years of the UK's coalition government.
That was the time when the British economy was flatlining. Sure, there were periods when activity expanded. But the recovery never really gained traction and was vulnerable to unexpected shocks. Sometimes these were external – as with the eurozone's debt crisis; sometimes they were internal – as with ill-timed and excessive austerity.
Now take a look at the eurozone. Here too, the economy is struggling to gain traction. Here too, it is extremely sensitive to shocks, the latest of which is the threat of a full-scale confrontation between Russia and Ukraine. Here too, there has been far too much austerity far too soon.
Result? The recovery, such as it was, has come to a standstill. Low inflation is threatening to become deflation. In one important respect, the position facing the eurozone is more parlous than that facing the UK two or three years ago. Firstly, the public finances are in even worse shape. Italy, for example, already has a national debt worth around 130% of its annual output. Zero growth plus deflation plus a lack of monetary wriggle room adds up to a real threat that debts will become unsustainable.
Secondly, the policy response in the eurozone has been inadequate. Give George Osborne some credit. When it was clear the UK had run into the sand in 2011 and 2012, he eased up on austerity. Infrastructure projects were taken out of mothballs. The chancellor pushed back his targets for reducing the national debt and balancing the books.
Similarly, the Bank of England kept trying initiatives until something worked. It started by cutting interest rates to zero, moved on to creating £375bn of money through QE and finally settled on Funding for Lending. The ECB's response, by contrast, has been slow and tentative. Only now is it working up its own version of Funding for Lending; German resistance to QE means it is not a runner until 2015.
The eurozone is now at a fork in the road. Plan A - hoping that time and structural reform will do the trick - is not working. It is time for Plan B - a rethinking of austerity, a more aggressive use of the European Investment Bank to fund infrastructure projects, a fast-tracking of QE.
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