Expert warns Eurozone recovery is overhyped

Fiscal flexibility is a start but more must be done to avoid a lost decade


On the day of ECB interest rate setting a London Business School professor has warned of the need for action not words, if we are to avoid a lost decade.

Richard Portes CBE, Professor of Economics, London Business School and President of the Centre for Economic Policy Research, told Reuters TV: “Mr Draghi made it very clear that inflation expectations have lost their anchor. Inflation expectations are going down. They haven’t been firmly anchored for some time. Now, finally, this is being recognised. We are slipping towards deflation, and Japan’s lost decade and more is an example of just how dangerous that is.”

Mr Draghi’s calls for fiscal flexibility in Europe are a welcome start in a move away from years of rigid austerity measures which have failed to boost the Eurozone’s recovery.

Professor Portes said: “Einstein said that the definition of madness is repeatedly doing the same thing and expecting different results. And he was right.”

In a Financial Times column (20 Aug) which immediately preceded the ECB chief’s surprise remarks at Jackson Hole, Professor Portes warned: “Perceptions are important, but you cannot conjure an economic recovery by summoning the confidence fairy. There is no substitute for pragmatic, non-ideological policies that accept and confront the data – which tells us that current policies are failing.

“The acute, pressing problem is aggregate demand,” Professor Portes said. “Repairing the credit system, implementing serious reforms of state expenditure and taxation, creating more flexible labour markets, finally opening the services market to cross-border competition – all are indeed very important. But they will not liberate the Eurozone from stagnation.

“Lightening the load of debt on private and public sector balance sheets requires a convincing return to growth. That will not come from policies such as raising bank capital and primary fiscal surpluses, which do not stimulate economic activity. Seriously expansionary monetary and fiscal policies are both necessary and urgent.”

In his address at Jackson Hole Mr Draghi certainly seemed to have heeded the warning. “Very significantly”, Professor Portes told the Financial Times (letter to the editor, 26 Aug) “he argued for co-ordination of monetary and fiscal policies. He also endorsed the large EU-level public investment programme proposed by Jean-Claude Juncker, the incoming president of the European Commission.

"It is to be hoped that Mr Juncker will appoint as commissioner for economic and monetary affairs someone who will work together with Mr Draghi along these lines, rather than perpetuating the failed policies of his predecessor."