This commentary is from the archive,
as your commentator is on holiday. It first appeared in January 2015
The
Governor of the Bank of England, Mark Carney, has made some interesting
observations on both the Irish and Eurozone economies. In a wide-ranging speech
in Dublin, he was able, perhaps given his pedigree (his forebears emigrated
from Ireland to Canada) and career to date (former Canadian Central Bank chief,
and now head of the BoE), to deliver some home truths to all concerned.
He
talked of a debt trap in Europe. This has come about because of slower growth
than should have been expected given the level of borrowing that took place in
the past. Ireland was particularly at fault in this regard, borrowing more
money per capita than most other nations for consumption, when it should have
been for investment, which would have been calculated to provide the required
expansion of the economy.
That
was then. This is now, but he was ready with a present-day solution to the
problem too. The Eurozone needs a fiscal as well as a monetary union, with
capital transfers across member state borders in order to redress the economic
imbalances that exist. He should try telling that to Germany, where the real
fear is that it will end up being the bailer-out of all other Eurozone
countries, particularly those at the periphery. It is not as simple as that, of
course. Thinking Germans know that the Euro has been good for them, but there
is a sizeable voting population there that sees things in more black-and-white
terms.
Outside
of Germany, talk of a fiscal union, which would pool all taxation and spending
state functions, smacks far too much of a federal system, a veritable United
States of Europe. There are many who object strongly to this, and not just
because they like their own tax-raising powers. Cultural issues are very much
to the fore also.
Economic growth is needed (or would
inflation do?)
The
linking of debt and economic growth by Mr. Carney is interesting in another
regard. One of the problems besetting the developed countries at present is a
standstill, or even a reversal, in inflation. Central bankers, in particular,
are concerned about this, as they fear it will encourage people to defer
spending, particularly on big-ticket items. Others see it as a good thing,
resulting in the pay packet of each worker going just that little bit further
and providing for somewhat more day-to-day consumption, which is one basis for
economic well-being in a country.
But
low or non-existent inflation, of course, preserves the value of all that debt
over time, whereas rising inflation diminishes it in real terms. This means
that economic growth and rising inflation could do the same job of mitigating
the effects of the debt trap. They normally, of course, go hand-in-hand. But
why did Mr. Carney not say so?
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