Five years ago, the situation across Europe looked dire. Ireland and Spain were floundering as they confronted a painful come-down from a decade-long economic boom, cracks were showing in the Eurozone as a whole, and Greece was on the verge of complete economic and social collapse as a result of soaring borrowing costs and fiscal over-commitment. Fast-forward to the present day, and the European Central Bank (ECB) has announced that it will undertake a program of quantitative easing (QE)—the process by which a central bank injects liquidity into an economy by using newly created money to buy assets and bonds held by banks. The timing of this announcement, when the United States and the United Kingdom have started to pull ahead in terms of growth and scale back their own QE programs, begs the question: Why now? Why are Europe’s leaders suddenly willing to undertake action that they deemed too extreme for years? The answer is simple. The ongoing economic and social pain in Greece and Spain threaten the very ideals on which the EU and the Eurozone were built.
Greece, the country that came most spectacularly close to tearing apart the Eurozone in 2010, stands as the country set to benefit most from this new ECB intervention. 2014 was actually set to be something of a triumph for Greece. Growth had returned after six years of recession, and it appeared that recovery might finally have dawned for the poor man of the Eurozone. Consumer and business confidence seemed to be heading in a positive direction for the first time since the Eurozone crisis began, with one economic-sentiment index standing at 102 in October—during the depths of the crisis it fell to around 80, and until this year had struggled to recover. It was thought that, finally, the pain of austerity might ease and be replaced by the relief of growth and falling unemployment. However, with the end of the year approaching, public discontent with austerity erupted, and as a result, a technicality of the Greek political system brought about the dissolution of parliament and snap elections in the New Year. With the growing potential for sclerotic growth across the Eurozone to endanger the ‘European Project’ as a whole, it appears that Angela Merkel has now been convinced that extraordinary measures are a risk worth taking. With this news, it appeared that history was to repeat itself; the Greek stock exchange fell by ten percent, bond yields rose to yearly highs, and investors began to once again become wary of the country. All this because of the chance that a far-left party would triumph in the premature elections and reject the harsh bailout terms set by Greece’s creditors, causing havoc in the financial markets and raising once again the possibility of the country’s abandonment of the euro (the so-called ‘Grexit’). The intervention of the ECB in financial markets will, if not assuage the anger of the Greek people, then at least with time coax growth into their beleaguered economy. The ultimate hope is that this injection of money into the European economy will pull Greece back from the brink and put a stop to all thoughts of abandoning the euro.
With the growing potential for sclerotic growth across the Eurozone to endanger the ‘European Project’ as a whole, it appears that Angela Merkel has now been convinced that extraordinary measures are a risk worth taking.
However, Greece is not the only economy in need of a boost. Spain’s economy is still mired in hard times mostly as a result of the crippling fall in wages that its workers have suffered as a result of a recession followed by strict austerity measures. Mercifully, the Spanish government is not on the verge of picking a fight with Germany and the European Commission; its population seems resolved to endure the austerity imposed upon it. However, it may not stay this subdued for long, especially with the Greeks looking increasingly likely to reopen the debate surrounding the benefits of austerity. Despite the positive signs being shown by macroeconomic indicators such as GDP growth and net exports, for many Spaniards, the pain seems both acute and never-ending. Youth unemployment is far and away the highest in the developed world at an astounding 54 percent, and the government is struggling keep basic public services running. From the point of view of the average Spaniard, the benefits of renewed growth are not filtering down to the individual level quickly enough. This problem is outweighed, however, by the worrying fact that Spain’s nascent recovery is almost entirely dependent upon the performance of its neighboring economies. As growth in the rest of the Eurozone (and wider Europe) diminishes, the risk is that Spain will start to backslide and suffer another drop in growth and living standards, leaving its population significantly poorer than that of the Eurozone’s other big economies. Such a disparity in wealth needs to be avoided, and ECB policymakers know this only too well. A wave of Spanish migration to the richer countries in the North could exacerbate calls to curb freedom of movement within the EU and fuel the rise of far-right parties that have already gained some traction in France, Germany, and the United Kingdom.
The reasons for this unprecedented round of monetary stimulus, therefore, are relatively clear. Up until the beginning of 2015, the country that least wanted to undertake a stimulus of this kind—for fear of causing rampant inflation in the future—was Germany. However, with the growing potential for sclerotic growth across the Eurozone to endanger the ‘European Project’ as a whole, it appears that Angela Merkel has now been convinced that extraordinary measures are a risk worth taking. The Germans have, in the past, balked at the potential for quantitative easing to increase future inflation, the idea being that the creation of money will lead to ‘too much money chasing too few goods’ once growth has returned. However this risk can largely be mitigated by proper management and the economic benefits of QE are obvious and sorely needed: it will not only help to increase liquidity among Greek and Spanish banks, creating much-needed demand, but also help to reverse the deflation the Eurozone has fallen into. Also, in the absence of swift action, there exists a strong possibility that the disparity in economic prosperity between Greece and Spain and the richer Eurozone economies (France and Germany) will become so great as to cause large-scale skill flight to their northern neighbors. This would have the potential to leave Spain and Greece permanently worse off, since they would have lost a good part of their human capital. This needs to be avoided at all costs, since it would undermine the ideals of economic and social cohesion that European leaders have worked towards since the end of the Second World War. Hopefully, the new measures will be enough to bolster growth in Europe’s struggling economies, and in the process maintain European unity.