Euro is ‘holding back’ world economy

Roger Bootle didn’t pull his punches in his outlook for 2015

The Euro is a drag on global economic growth and ongoing demands for austerity could result in a Greek exit from the single currency leading economist Roger Bootle warned economic attachés at a recent AERL meeting.

Bootle told envoys that bailout programmes designed to hold the Eurozone together were “holding back” global economic growth because the effect was to create “the biggest source of deficient demand in the world”.

Looking to the negotiations on the Greek debt, he said there was a “fair chance” of a Greek exit from the single currency. “Not because the Greeks ask for it but because there is a bust up and the German government is not prepared to concede [debt forgiveness] that the Greek government is demanding.”

The fear is that easing up on Greece would lead to similar demands in other debt-stricken countries such as Spain, Portugal and Italy.

Eurozone economic attachés challenged Bootle on his views, saying the austerity programmes had provided a powerful incentive for economic reform which was starting to deliver results,notably in Ireland and Italy.

Bootle conceded that reform efforts, particularly in Greece, had been “staggering”. However, he said the “orthodoxy of internal devaluation” had dampened growth and deepened Eurozone deflation, both of which have had the effect of increasing debt.

A more effective route out of the crisis, he said, would be a more expansionary fiscal policy and public investment in infrastructure in Germany and other Eurozone countries running current account surpluses. But he added that this solution was unlikely because “Germans don’t do stimulus.”

The burden for stimulating the European economy would therefore fall to European Central Bank. But he said ECB President Mario Draghi had limited tools at his disposal since quantitative easing (QE) was unlikely to have the desired effect when the Eurozone banking system was still sub-optimal.

Lower oil prices over the long term could have a positive impact on overall global growth but may cause instability in some oil producing countries, he added.

He warned that the UK was not a safe haven for investors, saying there were “major clouds” on the horizon, notably the housing market risk, a huge current account deficit and the instability created by the general election coupled with the likelihood of a hung parliament. He also said an in-out referendum on Europe was “inevitable” no matter which parties made up a coalition government.