ECB keeps its head in the sand as German economy contracts

Draghi, where are you?

The Economist's Ryan Avent has made waves with a well-timed punchy question: why are we acting like the fact that the eurozone hasn't actually imploded means everything is alright there?

Some perspective is in order. Real euro-area output is at roughly the level of the end of 2006 and it is declining. The euro-area economy hasn't grown since the third quarter of 2011. Total employment is below the level first attained in the second quarter of 2006 and it is declining. The unemployment rate is of course at a record high 11.8%. And inflation—both core and headline—was virtually nil in the second half of 2012.

That's simply a dismal macroeconomic performance.

The European Central Bank deserves some credit for having halted the repeated attacks on the currency — and perhaps that credit should go to the president of the bank, Mario Draghi, himself. His declaration last July that the euro would be preserved "whatever it takes" is widely held to have been the turning point at which the survival of the euro was assured.

But the ECB's target should be higher than merely ensuring the continued existence of the currency it was created to oversee. And it's not just that the bank is trying, but failing, to boost demand in the eurozone. It has done, essentially, nothing. Interest rates remain well above even the zero-bound where conventional monetary policy falls apart, and its unconventional measures — which it was happy to employ when it was in a do-or-die situation — have been non-existent.

According to statistics released yesterday, Germany contracted by 0.5 per cent in the fourth quarter last year. Germany! That's the country that's supposed to be the beating heart of the eurozone. It's one thing when the analysis was that the ECB was unfairly trading Greek health for Germany; but based on who's being touted as success stories these days, you'd be forgiven for thinking that it's trading German health for Estonian. (Estonian GDP grew by 8 per cent in 2011, but that still left it 9 per cent below its pre-crisis peak — it's certainly not an unambiguous success story).

Draghi is apparently hoping that global growth will sweep in and restore the European economy from without, and that all he needs to do is keep it ticking over until then. But the job of a central bank governor is not to wait for dei ex machinae. And given the size of the eurozone, it may be rather hopeful to conclude that the is such a thing as a separate worldwide economy. Can the rest of Europe have a proper recovery with the eurozone depressed? What about the economies of North America, or Japan?

There's a temptation, especially on the part of those pessimistic about the EU in general, to throw their hands up and declare the situation irreconcilable. But despite — maybe because of — the ECB failing to even recognise there's a problem, it's not clear that it has no possible solutions. Once it gets its head out of the ground, maybe it will realise there are things it could have been doing all along.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Theresa May's U-Turn may have just traded one problem for another

The problems of the policy have been moved, not eradicated. 

That didn’t take long. Theresa May has U-Turned on her plan to make people personally liable for the costs of social care until they have just £100,000 worth of assets, including property, left.

As the average home is valued at £317,000, in practice, that meant that most property owners would have to remortgage their house in order to pay for the cost of their social care. That upwards of 75 per cent of baby boomers – the largest group in the UK, both in terms of raw numbers and their higher tendency to vote – own their homes made the proposal politically toxic.

(The political pain is more acute when you remember that, on the whole, the properties owned by the elderly are worth more than those owned by the young. Why? Because most first-time buyers purchase small flats and most retirees are in large family homes.)

The proposal would have meant that while people who in old age fall foul of long-term degenerative illnesses like Alzheimers would in practice face an inheritance tax threshold of £100,000, people who die suddenly would face one of £1m, ten times higher than that paid by those requiring longer-term care. Small wonder the proposal was swiftly dubbed a “dementia tax”.

The Conservatives are now proposing “an absolute limit on the amount people have to pay for their care costs”. The actual amount is TBD, and will be the subject of a consultation should the Tories win the election. May went further, laying out the following guarantees:

“We are proposing the right funding model for social care.  We will make sure nobody has to sell their family home to pay for care.  We will make sure there’s an absolute limit on what people need to pay. And you will never have to go below £100,000 of your savings, so you will always have something to pass on to your family.”

There are a couple of problems here. The proposed policy already had a cap of sorts –on the amount you were allowed to have left over from meeting your own care costs, ie, under £100,000. Although the system – effectively an inheritance tax by lottery – displeased practically everyone and spooked elderly voters, it was at least progressive, in that the lottery was paid by people with assets above £100,000.

Under the new proposal, the lottery remains in place – if you die quickly or don’t require expensive social care, you get to keep all your assets, large or small – but the losers are the poorest pensioners. (Put simply, if there is a cap on costs at £25,000, then people with assets below that in value will see them swallowed up, but people with assets above that value will have them protected.)  That is compounded still further if home-owners are allowed to retain their homes.

So it’s still a dementia tax – it’s just a regressive dementia tax.

It also means that the Conservatives have traded going into the election’s final weeks facing accusations that they will force people to sell their own homes for going into the election facing questions over what a “reasonable” cap on care costs is, and you don’t have to be very imaginative to see how that could cause them trouble.

They’ve U-Turned alright, but they may simply have swerved away from one collision into another.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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