With politicians in the U.S. and Europe abrogating responsibility for getting their zones of the world economy growing again, the task falls by default to central bankers. Yet they are standing pat for fear of being left spent in the event the feared second dip of recession materializes.
Economists have been cutting their global and national economic growth forecasts in recent months, but leading central banks have taken only relatively modest steps to stimulate economies. To deploy a cliche, they may have been talking the talk. They are not walking the walk. This week:
- the ECB left its benchmark interest rate unchanged at 0.75%. Last week, its president, Mario Draghi, promised to do “whatever it takes” to preserve the euro;
- the Bank of England, which last month announced an increase of £50 billion ($78 billion) in its quantitative easing (QE) program, held its benchmark interest rate at 0.5%;
- The U.S. Federal Reserve confirmed that it would keep keep its extremely low interest rates (0.0-0.25%) until late 2014.
Meanwhile, in the world of factory floors and customers, the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI) fell to 48.4 in July from 49.1 in June–edging even further away from the dividing line of 50 that separates contraction from expansion. Like central bankers in China, those in Europe and the U.S. are holding out the hope that the policy actions they have already taken will kick-in in time. That they are now keeping the last of their policy powder dry suggests that they are hoping against all hope.
Mario Draghi’s reputation as an inflation hawk took a back seat to his other reputation for being his own man when at his first meeting as head of the European Central Bank he surprised markets by cutting the central bank’s benchmark interest rate by a quarter of a percentage point to 1.25%. It would be too harsh to represent this as a slap in the face of his predecessor, Jean-Claude Trichet, who was criticized for raising rates, in the German interest, as it was taken to be, during a time of credit crisis, but Draghi’s reversal is a welcome sign of what will be a continuing need for independence especially in the face of the euro-zone leadership’s continuing inability to get a grip on its debt crisis. His diplomatic skills can mask the extent to which he is self-confident about following his chosen course, but as Europe politicians may find, being Jesuit-educated, Draghi will know how to make their minds follow.
Officials attending the IMF-World Bank annual meetings in Washington are tantalizing the markets. While they kicked any action to deal with the euro-zone crisis down the road to the EU council in Brussels in late October and/or the G20 summit in Cannes in November, they are letting the idea float that a course of action is finally in the making. This would provide for private holders of Greek debt to take a 50% haircut for, an increase in the size and flexibility of the 440 billion-euro ($600 billion) European Financial Stability Facility (EFSF) and a recapitalization of European banks most exposed to sovereign debt. If this plan for what is in effect a partial Greek default comes to fruition, it will need at least that much time to overcome some significant legal and political hurdles, notably, on the latter, the role the ECB will play in strengthening the EFSF, and some grisly horse trading with the banks and other private holders of Greece’s debt. The biggest risk to the euro-area — and to the global economy — remains a disorderly sovereign default or an unexpected shock triggering bank runs in the meantime.