FIRST PERSON - Alex Magno (The Philippine Star) - September 14, 2019 - 12:00am

Recession is a specter haunting the Eurozone economies.

Stymied by legislated debt ceilings, European governments could do little to counter the looming slowdown through deficit spending. The task of fighting what bankers euphemistically call “downside risks” is largely left to the European Central Bank (ECB).

Earlier this week, ECB head Mario Draghi announced two important decisions by the regional central bank.

First, the ECB reduced the deposit facility rate from -0.4 percent to -0.5 percent. This negative interest rate applies to cash reserves that banks park with the ECB.

So, instead of the ECB paying out interest rates for deposits, the banks pay the ECB to accept their reserve funds. This will have a ripple effect on the Eurozone banking system. Several European banks now apply negative interest rates on deposits made by their clients.

Negative interest rates are intended to flush out money from the vaults by making it costly to save. The money will, of course, go to purchases and investments.

This is the theory. Japanese banks have long applied negative interest rates to perk up this aging economy to little avail. While courting deflation, the Japanese economy remains in the doldrums.

Critics also argue that the negative interest rates cut into the profitability of the banks. That weakens rather than strengthens the banking system – a concern particularly in Europe where several large banks are already in trouble.

Second, the ECB announced it would be purchasing Euro 20 billion of debt starting Nov. 1. The asset purchase program, according to Draghi, will continue on for as long a necessary.

This sort of program is more closely associated with the “quantitative easing” programs undertaken by central banks in the wake of the 2008 global financial meltdown. This enables bondholders to sell their paper and thus convert assets into cash. With the cash, they may expand lending activities that will encourage economic expansion.

At some later date, when the economies recover, the central banks will have to unwind their positions, selling debt paper back to the market. When that happens, as it did when the US Fed decided to unwind despite Donald Trump’s objections, the result is a mop-up of liquidity and weaker growth.

With these twin moves, the ECB intends to bring up the inflation rate to 2 percent. A 2 percent inflation rate is considered the most ideal to keep economies healthy. Inflation has the effect of hurrying up spending. Deflation, by contrast, chokes the market by encouraging postponement of spending.

Through monetary easing, the ECB aspires to bring growth in the Eurozone to about 1 percent.  That pace of growth might not seem impressive by the standards of the dynamic economies of East Asia. But it will spell the difference between sustaining economic expansion and falling into recession.


The global economic slowdown is real. That slowdown is made more imminent by misdirected policies that choke trade and discourage investment flows.

Recession, like the wildfires now raging in the Amazon, Africa, Indonesia and even Australia, could break out anywhere at the most unpredictable moments. They could be pushed by political events or by the inaction of economic managers.

Brexit, for instance, is seen as a spark that could push the UK into recession. The longer the trade frictions between the US and China persist, it can be safely said the slowdown could worsen.

Those charged with managing growth must be both vigilant and competent. The general economic malaise plaguing the global economy creates tinderbox conditions. Both national and regional economies could suddenly find themselves in an episode of contraction.

The situation now prevailing in the global context produces strong headwinds working against our own economic expansion.

Just a year ago, it was nearly a given that the Philippine economy would grow by 6 percent. With more fortuitous developments, our economic managers even put 7 percent growth as a fighting target.

Things have changed dramatically. Today, few analysts are willing to grant GDP growth in the Philippines would even hit 6 percent.

In order to achieve that number, the economy should expand by 6.4 percent in the second half of this year. The lingering effects of the delay in passing the 2019 national budget continue to be felt, however.

Last month, the inflation rate fell to 1.7 percent. That is significantly below market expectation. In a way, it could be said our problem now is the complete reverse of last year’s: the inflation rate is too low. It is certainly below the 2 percent inflation rate the Europeans consider to be the norm.

This is a good problem to have, however.

With low inflation, there is much room for our monetary authorities to push down policy rates further and encourage greater liquidity in the banking system. Cheaper money is needed to encourage more investments. So far, new investments are well below expectation.

There is definitely enough elbowroom for government to incur a larger deficit. But a larger deficit should not be because of unproductive spending on subsidies and dole outs. That will violate the norms of fiscal discipline and create complex problems down the road.

Even across-the-board wage increases for public sector workers will add little to productivity. The new debt we will incur to fund a larger deficit, without pushing up productivity, will be difficult to service in the future.

The best way to put the larger elbowroom for deficit spending is to invest in the infrastructure buildup. This will enlarge the asset base of the economy, improve efficiency and enhance productivity as we go along.

Quantitative easing need not be limited to tinkering with the interest rates.

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