Hamish McRae: Europe’s structural crisis far overshadows Brexit woes

The eurozone economy is in trouble and it has nothing to do with Brexit. This Thursday the European Central Bank will acknowledge that growth this year will be much lower than the 1.7% it forecast in December. How much lower? Well, the market consensus is around 1.4%, so anything lower than that would be a shock.

It would be more of a jolt if it downgrades its forecasts beyond that, for 2020 and 2021. That would suggest that what is happening is not simply a blip, but that the structural weaknesses the eurozone faces are embedded.

So what will it do? I don’t think we should expect too much from this meeting. More likely we will get an indication that the ECB is ready to take action some time in the next couple of months.

Clearly any increase in interest rates is off for the foreseeable future, and there will be technical measures to pump funds into the banking system. Expect more TLTROs, which are targeted longer-term refinancing operations, whereby the ECB lends cheap money to banks so that they are pushed to lend more to their business and personal customers. The trouble is that this is more of the same. Last autumn it seemed the huge effort by the ECB over the past decade had managed to stimulate (or at least support) a sustainable recovery.

All major economies grew in the first half of the year, unemployment fell, and the ECB was contemplating ending its forms of money-printing, and even starting to think about increasing interest rates.

Then it all went wrong. In the second half of the year Italy went into recession, Germany barely avoided it and France only inched forward. Lagging indicators such as unemployment are still improving, and that is hopeful. But in the past couple of months just about every other indicator has been worryingly bad and a few have been real shockers.

For example in December the eurozone’s industrial production fell by 4.2%. That is the worst since 2009. Car sales were down 4.6% for the EU, which you could say is sort of OK given the wave of sentiment against diesel, but in Ireland they were down 12% and the Netherlands 18%.

We are too close to all this to know quite how grave it is. Any comments from the ECB this week will be helpful, and it will be good to know it is taking this seriously. But even if this is just a nasty few months driven by a combination of disparate factors — weak export demand in China, the car industry’s woes, disruption in Italy and so on — the problem won’t be solved by still more money being pushed into the system by the ECB. Nudging a French bank to lend more money does not make the Chinese buy more VWs.

Europe has a structural problem, or rather a series of different structural problems depending on which country you are looking at, that will not be tackled by yet more cheap money.

The nearest parallel is Japan. Since the early 1990s it has had ultra-cheap money: the current 10-year Japanese government bond rate is just below zero. Yet for a generation Japan has stagnated. Its GDP was actually slightly lower in 2017 that it was in 1995. There are all sorts of reasons for this, including a reaction against the excesses of the late-1980s financial boom, and of course its ageing population. But it is almost as though the whole country made a collective decision that it no longer wanted to conquer the world economy, and instead wanted to retreat into calm and comfortable seclusion.