European Central Bank president Mario Draghi has a problem. The conventional tools employed to stimulate growth within the eurozone have all but been used up. The ECB base rate is a nominal 0.05 per cent, while banks putting money on deposit have to pay 0.2 per cent interest for the privilege. Core inflation has dwindled away to just 0.7 per cent, while unemployment remains uncomfortably high at 11.5 per cent.
The currency area's three biggest economies, Germany, France and Italy, are all on the brink of recession, and in the back of Mr Draghi's mind is the obligation to protect the value of the euro. It seems then that all the monetary levers have been pulled to little effect. Running alongside all of this, globally active fund managers have become frustrated with the lack of progress in pulling around the eurozone economy, and have started to withdraw funds from the region.
The question now is will the ECB's 'whatever it takes' reassurance be enough. There are undoubtedly political overtones that will make the bank's job that much more difficult. Certainly there is unanimity inside the bank's council to increase the size of the central bank's balance sheet by €1,000bn (£784bn), but reports suggest that pursuing a policy of quantitative easing by making sovereign bond purchases is opposed not just by Germany but by nearly half of the 24-member governing council. The Centre for Economics and Business Research has repeatedly called for quantitative easing as a necessity, but rightly adds that it will possibly not be enough to prevent the eurozone tipping into its third recession. This leaves the probable solution of fiscal expansion solely in the hands of a disunited and fragmented political structure where policy consensus is typically conspicuous by its absence.
Which brings us neatly around to the UK's current stance on Europe and calls for political reform. As the eurozone stagnates, it's possible that calls for a root and branch restructuring will be seen as more than a political sop to prevent a general migration towards supporting the policies of Ukip. European politicians cannot be blind to the fact that the UK economy is growing, and that the US authorities have already taken their foot off the stimulus pedal. More is needed in Europe to avert the risk of deflation and stagnating growth, and the regulatory tweaks employed so far have simply not been enough to stop the rot.
Next week's economics…
With speculation that UK chancellor George Osborne will have to make deeper cuts in public spending to meet his austerity targets, attention will focus on next Friday's release of public sector borrowing data for October. The numbers are important because there is a general election in six months' time, and current borrowing remains some way off target at £100bn. The problem is that, although the chancellor has stuck to his planned cuts, disappointing tax receipts and sluggish growth have combined to restrict the rate at which borrowing has declined.
The question now is whether deeper cuts will be required. The alternatives are higher taxation or cutting the budgets of departments such as health and education that have previously been ringfenced. Neither seems to be palatable or politically acceptable so near to an election.
Before then, inflation numbers are due for release on Tuesday. Consumer prices are expected to remain relatively benign, and close to the annualised 1.2 per cent recorded in the year to September. Mild weather and weaker oil prices will help, while food costs have been depressed by the continuing price war among the supermarkets.
Rightmove house prices are released on Monday, and some contraction from the 7.6 per cent annualised increase reported last month seems likely. All of this will reflect a let-up in the pace of London house price inflation, where values have been affected by proximity of the general election and the possibility of a mansion tax should the Labour party form the next government.
On Wednesday, the Bank of England releases the minutes of its monetary policy committee meeting. As always, the focus will be on how many, if any, members show an inclination to alter the current stance on interest rates and monetary stimulation. The smart money is on no one stepping up to alter the current status quo.
