News Column

Europe must put more money into economy

June 21, 2014

Gulf News

The 2008 financial crisis had a double whammy effect on the economies of the European Union. Not only did it bring economic activity to a screeching halt, it exposed the underlying structural weakness of the euro. Yes, there was a European Central Bank to administer the single currency, but no, the ECB had no effective powers to issue bonds to back up the floundering currency.

Fast forward to the present day, and Europe as a whole is still suffering the lingering effects of the crisis. According to Christine Lagarde, Managing Director of the International Monetary Fund (IMF), the 18-member Eurozone economy remains at pre-crisis levels, deflation is threatening, and unemployment remains high. April data shows 11.7 per cent of the Eurozone workforce remains jobless. If the data for the under-25 category is isolated, that level is closer to 18 per cent as new graduates are under-employed and unskilled workers are out of sync in sectors becoming more specialised with each passing month.

So what to do? According to the IMF, the ECB needs to move to full scale quantative easing. That's sage advice indeed, and the ECB would do well to heed it closely. In effect, what Lagarde is saying is that it's time more money was put back into economies to spur growth; deposit rates need to be low as savings sitting there are better put to use in circulation, funding new ventures and creating jobs; healthier banks after years of stress tests need to focus on lending funds to finance new businesses or startups to bring more people into the workforce; and the ECB should adopt policies that end the deflation threat.

But the ECB is not a fiscal island onto itself. For the IMF's advice to be effective, national governments now need to end policies of austerity that cut public sector spending and slashed social programmes. Now is the time to borrow wisely for positive growth, provide incentives for meaningful job creation and cut personal and corporate taxes to bring more people into the workforce and allow those with jobs to spend on consumer goods and services.

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Source: Gulf News (United Arab Emirates)

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