On March 22, Germany’s worst manufacturing survey in seven years sent investors rushing to buy bonds. For the first time in three years yields on German 10-year government debt fell below zero, meaning that investors are willing to pay to hold it. And later that day in America the yield on 10-year Treasury bonds fell beneath that on the three-month variety. The last time that happened was 2007, one of the “inversions” in bond-market yields that preceded each of the past seven American recessions.
These bond-market blues are fueling concern that the global upswing in 2017 and 2018 is making way for a slump. There are reasons to worry. Tax cuts have boosted demand in America but will not be repeated; China has slowed; the trade war grinds on. However, indiscriminate global gloom is a mistake. America and Europe are in vastly different positions. Only Europe should be a cause of deep concern.
America’s inverted yield curve suggests that the Federal Reserve’s interest-rate rise in December, its ninth in three years, will be its last for now. But that does not mean recession is imminent. The Fed has recognized — belatedly — that the risks to growth have risen, as Jerome Powell, its chairman, confirmed on March 20. And America is in a position of relative strength. Unemployment is low; consumers are flush with cash; and underlying inflation is close to the Fed’s 2 percent target.
Europe is in a tighter spot. Although America may have finished raising rates, the eurozone has never gotten started. Growth this year could be little more than 1 percent. Wage growth is muted, inflation is below target and Italy is in recession. With rates close to zero, the response of the European Central Bank (ECB) has been to postpone monetary tightening and to provide more cheap funding for banks. Its willingness to do more may be limited. On March 27, Mario Draghi, its head, said that the ECB sees its inflation forecast as having been “delayed rather than derailed.”
The primary cause of Europe’s slowdown — and particularly Germany’s — is falling global trade, notably China’s slackening demand for goods. The continent relies on Asian markets far more than America does and China slowed in late 2018. Policymakers there are now trying to stimulate the economy. A rebounding China could yet come to Europe’s rescue, especially if Donald Trump and Xi Jinping strike a trade deal.
That the fate of the eurozone should depend on Beijing and Washington is a dereliction of duty. It is an economic superpower with its own fiscal and monetary levers. It should be countering downturns itself. More unconventional monetary stimulus will be hard thanks to northern Europe’s horror of appearing to create money to finance deficits. But the eurozone has room for fiscal stimulus. Its aggregate budget deficit was just 0.6 percent of GDP in 2018. Its net public debt was 69 percent of GDP.
Because Europe lacks a centralized fiscal policy — itself a failure of politicians — the onus is on individual countries. Those with healthy finances, such as Germany and the Netherlands, could enact a coordinated budgetary loosening.
They should focus on tax cuts and boosting public-sector infrastructure and military spending. Unless they do, the eurozone risks falling back into stagnation — the trap it faced after the financial crisis. For the eurozone to tolerate that risk in the name of prudence is self-defeating. Astonishingly, the chances are that it will.
Editor’s note: Business Forum submissions of no more than 900 words can be sent via e-mail to Doug Iverson, business team leader, at email@example.com.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.