What's so bad about easy money?
The aftermath of the Great Recession was worse for the eurozone than for America. But things may finally be turning around in Europe.
Yes, Spain and Greece are still stuck in Great Depression levels of unemployment. But eurozone unemployment as a whole recently fell to 9.3 percent — its lowest level since 2009. And economic growth slightly outpaced the U.S. over the last two years.
One big reason for this may well be the European Central Bank's quantitative easing program, which began in early 2015. It revived the local train manufacturing industry in the Italian town of Pistoia, recently profiled by The New York Times, in a story that's arguably been repeated over and over in different places across the eurozone economy.
Now the ECB is talking about winding the bond-buying program down. As the Times put it: "Analysts agree that the day is not far away when places like Pistoia will have to stand on their own."
But why should they have to?
After hundreds of layoffs, the rebirth of Pistoia's train factory seems to have also rescued the town's social fabric. "A few years ago we felt like we were on a stationary bicycle, pedaling but going nowhere," a local union official told the Times. “Now we are moving again.”
"Money is in circulation again," added a 66-year-old newsstand owner. "We’re very happy in Pistoia."
The trains Pistoia is building are not sitting idle or being dumped into the sea. Enough new orders have poured into the company to keep the town's workers occupied for the next six years. People and businesses across the continent want these vehicles. The phrase "stand on their own" implies Pistoia's turnaround is some sort of Potemkin recovery — a useless Soviet-style make-work program. But that's clearly not what's going on.
Quantitative easing (QE) can sound horribly arcane. But it basically boils down to a central bank printing a bunch of money and buying up financial assets. In fact, when the ECB or the U.S. Federal Reserve do normal adjustments of interest rates, it works basically the same way. Except central banks usually limit themselves to targeted purchases of government bonds. With its new program, the ECB bought up bonds issued by private corporations and state-owned enterprises as well. The Times found that infrastructure projects were a pretty clear theme across all the various bonds purchased: "Effectively, the European Central Bank is financing an enormous public works program in Italy."
The ECB also takes pains to avoid intentionally targeting particular countries (like Italy), much less particular industries (like rail) or particular communities (like Pistoia). And there's a reason for that: If the ECB committed to buying endless bonds from Pistoia's train company specifically, you could imagine a scenario in which the town really did produce trains that just piled up in a junkyard. Normally, any business that provides a good or service that no one is buying would quickly collapse. But with a central bank pumping endless money into it, the company could just continue on, zombie-like.
That's the thing about socialism that fans of capitalism fear: economic activity that's useless, because it's directed by a central-planner rather than by the price signals of the competitive market.
By spreading its largesse, the ECB is trying to avoid that scenario. Instead, it's just trying to bring down eurozone interest rates on a grand scale. There are already businesses out there that want to produce goods and services, and there are already customers out there that want to buy them. Lower interest rates make credit easier to acquire, which lowers the hurdle those two parties must jump to do a deal.
And ultimately, the risk of lower interest rates across a whole economy is higher inflation across it, too. But the eurozone's core inflation rate has been stuck at 1 percent for years, nowhere close to the ECB's 2 percent target, much less exceeding it. The headline inflation rate spent that same time period flirting with negative territory, threatening a destructive deflationary spiral.
So why on Earth would anyone think now is the time for eurozone communities and companies to "stand on their own?" Why should anyone fear easy money?
If anything, the eurozone has the opposite problem. Lower interest rates can only revive an economy when plenty of buyers and sellers are already prepared to do a deal, and they just need a little extra help. But what if large numbers of buyers are so precarious and cash-strapped that even super-low interest rates can't get them over the hurdle?
The ECB's bond-buying program can get more cash into the coffers of businesses looking to buy and sell each others' goods and services. But it can't get more cash into the pockets of the eurozone's ordinary consumers. The best it can do is get more cash into government coffers. For example, Italy's rail network is managed by a state-owned company. And it used the ECB's easy money to buy 39 new trains, thus adding to Pistoia's revival. Even better, Europe's governments could get their citizens more spending money with welfare and cash aid, more generous pensions, and health benefits.
But here's the rub: In exchange for easy money, the ECB has required governments in Italy, Spain, Greece, and elsewhere to cut spending on various social programs through brutal austerity. It's like offering a gunshot victim surgery only on the condition that they shoot themselves again.
The day may come when the eurozone suffers from too much easy money, and too much government direction of that easy money. But right now, that day is very, very far off.