In the second quarter of this year, real domestic demand in the eurozone was 5 per cent lower than in the first quarter of 2008. The eurozone’s unemployment rate has risen by just under 5 percentage points since 2008. In the year to July 2014, consumer price inflation in the eurozone was 0.4 per cent. From these telling facts one can conclude three simple things: the eurozone is in a depression; lack of demand has played a crucial role; and the European Central Bank has failed to deliver on its own price-stability target. This is not just sad. It is dangerous. It is folly to assume continued stability if economic performance does not improve.
A necessary, though not sufficient, condition for grappling with these challenges is understanding them. In this regard, Mario Draghi, president of the ECB, and the one senior eurozone policy maker who shows grasp of the issues, made a vital contribution at this year’s Jackson Hole symposium. Two points, in particular, need stressing. First, he stated that “we need action on both sides of the economy: aggregate demand policies have to be accompanied by national structural policies”. Second, he made a new promise: he remarked, off text, that the ECB “will use all the available instruments needed to ensure price stability in the medium term.”
Choirs of angels must have sung over the statement that the eurozone has a problem with demand. Hitherto, eurozone orthodoxy has treated this truth as unmentionable. No less important might be the promise of action. It reminds us of the celebrated “Whatever it takes”, delivered by Mr Draghi in London in July 2012. This led to the announcement of the ECB’s outright monetary transactions programme, which defeated pervasive panic without firing a shot. Astonishingly, yields on Italian and Spanish 10-year debt have fallen from 6.3 per cent and 7.0 per cent, respectively, at the beginning of August 2012, to a mere 2.3 and 2.1 per cent early this month. That is below the yield on UK gilts.