There is simply no easy fix for Europe’s depressed economy.
While another healthy dose of monetary stimulus might help bring down the fever and provide some short-term relief, it won’t cure the patient. For that, Europe needs to take on some tough structural reform aimed at attracting a steady stream of private investment. While that’s no easy task, it’s hardly impossible.
Data released Thursday on the health of Europe’s economy painted a bleak picture. Overall economic growth in the second quarter of the year was flat, effectively ending an economic recovery on the continent some had believed was just in its infancy. Among the economic losers was Germany, Europe’s largest and most resilient market. Its economy contracted 0.2% from the previous quarter on weak consumer sentiment and tepid industrial production.
As for the rest of the continent, while there was some encouraging news from Europe’s periphery, with Spain posting a relatively healthy uptick in GDP, things, for the most part, were pretty depressing. Given how far the economies of Spain and the rest of the periphery have fallen over the last few years, they’ll need to see much stronger growth if they ever hope to get back on sound economic footing.
As the sorry economic news hit the tape, sovereign bond yields across the continent fell as investors fled to safety. That increase in demand pushed yields on the German 10-year bond below 1% for the first time ever. Investors were essentially betting that the weak GDP numbers would prod the European Central Bank to set off another round of monetary stimulus, this time through an asset buying program.
The ECB didn’t react immediately, which isn’t a surprise given that the entire continent is on vacation at the moment. Nevertheless, investors are confident that the central bank will soon move to address the weakness at the heart of Europe’s economy through increased stimulus of some kind.
That may be true, but it doesn’t shed any light on the fate of Europe’s long-term economic prospects. Such heavy doses of monetary stimulus may move rates, but it won’t foster economic growth on its own, especially the sort of long-term growth needed on the continent.
Just look at Japan. Its economy has been in a slow and painful decline for the past 25 years. That’s because Japan thought it could solve its economic issues by throwing money at the problem and hoping the bad news would just go away. When bond yields fell below 1%, it too embarked on round after round of monetary stimulus and quantitative easing in the hopes of reigniting growth. A decade later, Japan is no better. It reported a 6.8% (annualized) drop in its GDP on Tuesday for the second quarter. While much of that decrease has been attributed to an increase in the state consumption tax, it remains a sizable move to the downside.