Massive Stimulus Does Not Prevent Eurozone Slowdown

The ECB balance sheet has risen to 53.9% of GDP in July 2020. This compares to a 32% of the Federal Reserve and 33% of the Bank of England. This means a 1.78 trillion euro increase year-to-date. Furthermore, excess liquidity has soared to 2.9 trillion euro, a 1.2 trillion increase since January. Added to this unprecedented monetary stimulus, the Eurozone has included a record-high 10% of GDP in various fiscal stimulus programmes. None of it has prevented the economy from showing signs of slowing down in August.

After a strong bounce in May and June, coming from the re-opening of most economies and the base effect, high frequency data compiled by Bloomberg Economics shows an evident slowdown in July and August. All economists that follow the eurozone economy are warning about the worrying weakening of leading indicators. The OECD has also published its July 2020 Leading Indicator Index which shows that economies like Spain are not just showing signs of weaker growth, but contraction. Italy continues to improve but at a slow pace, while France and Germany post declining growth levels.

The reason is evident. All the Eurozone monster stimulus is focused on perpetuating bloated government budgets and incentivising non-economic return or subsidized spending. The entire European Recovery Fund is clearly aimed at promoting white elephants disguised as green projects, but what is more concerning is that the Eurozone green deal includes more taxes and measures to prevent demand growth than productivity-enhancing plans.

This lesson should have been learnt in 2009. The European Union launched its massive Growth and Jobs Plan, which rose to more than 1.5% of the EU GDP, and the economy did not improve, while more than 4.5 million jobs were lost.

The problem of these massive stimulus is that they benefit the wrong parts of the economy. Current government spending in entitlements and subsidies, massive deficits and the corporations that take advantage of the massive private bond purchases and liquidity injections are the large multinationals and national champions that did not have any problem accessing markets in the past.

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