Something weird happened when Boris Johnson became prime minister last week. No, I mean, something weird apart from Boris Johnson becoming prime minister.
The pound rose on the foreign exchange markets. The reason why this seems weird is that you might have expected a sharp fall after Johnson entered 10 Downing Street. After all, he has—more or less—committed himself to leaving the European Union without a deal if, as seems very probable, Brussels refuses to give him the terms he wants.
Given that that a no-deal Brexit is likely to bring plenty of economic disruption, you would expect the markets to bet against the pound. Instead, according to the Financial Times, it experienced “its biggest rally against the euro since May”.
The reason, however, had nothing to do with the markets’ faith in Johnson. The big story was actually the poor economic plight of the Eurozone.
The day after Johnson took over, a much more powerful figure, Mario Draghi, president of the European Central Bank (ECB), gave his own press conference.
Draghi is due to retire in October, but clearly he intends to go out with a bang. He announced that the ECB is preparing a new package of measures to stimulate the financial system, following the approach he has pursued ever since taking office in 2012. He explained, “You still see signs of strength in the economy. At the same time, this outlook is getting worse and worse and it’s getting worse and worse in manufacturing especially.
“It’s getting worse and worse in those countries where manufacturing is very important. But because of value chains, this propagates all over the Eurozone and so this must be taken into account. The reasons were basically found to be in the general uncertainty that’s now been with us for several months, actually more than a year, and which relates as I said many times to trade wars, to geopolitical tensions, too.”
As if to confirm Draghi’s gloom, that same day “German factory executives reported that industry conditions are in ‘free fall’,” according to the Financial Times. “The Ifo Institute’s manufacturing business climate index slumped to minus 4.3 in July from positive 1.3 the previous month.
“The reading was the lowest in more than nine years” in the aftermath of the 2007-8 financial crash.
Draghi’s statement underlined the plight of all the major central banks since that crash.
They have become the main governmental drivers of economic growth, buying up financial assets and keeping interest rates very low as ways of supporting the financial system
The efforts that these central banks have made to step away from these policies have all proved abortive because economies remain fragile. This is indicated by the low level of inflation—1.3 percent in the eurozone, way below the ECB’s target of around 1.9 percent.
But many commentators think the central banks are running low on the ammunition they need in the event of another recession. Interest rates are already too low to cut much further, and the pool of assets central banks could buy is shrinking.
Draghi underlined this by saying, “If there were to be a significant worsening in the Eurozone economy, it’s unquestionable that fiscal policy—a significant fiscal policy, mostly in some countries but also at the euro area level—becomes of the essence.” He is calling for governments to increase spending in the face of a new recession.
The problem is that the Eurozone remains locked into the austerity policies—central to which is cutting public spending—it embraced a decade ago.
Olaf Scholz, Germany’s Social Democratic finance minister, said on Thursday that it was “not a wise idea” to increase public spending, since this would lead to higher prices. This kind of deadlock between do-nothing politicians and hyperactive central bankers is another sign of neoliberalism’s impasse.
And the pound? By the end of last week it was falling, this time because the dollar was stronger. Sterling’s fluctuations seem to depend more on what happens in more powerful economic regions than on anything in Britain.