For all the talk at the World Economic Forum in Davos this week, the near term future of Europe rests on two depressingly familiar events taking place hundreds of miles away.
First, in Frankfurt on Thursday, European central bankers will wrestle with just how far they’re prepared to go to prevent the region’s stagnant economy falling into a deflationary spiral.
Having cut interest rates as low as he can, and tried limited monetary stimulus, ECB President Mario Draghi is set to move the goal posts by announcing up to one trillion euros ($1.2 trillion) in full-bore quantitative easing — buying government bonds.
Across Europe few doubt the need for urgent action — even Germany has softened its opposition to printing money as inflation in the eurozone turned negative.
But with the interests of 19 countries to take into account, Draghi’s so-called “big bazooka” could turn into a disappointing compromise, especially if national central banks — rather than the ECB — end up buying the bonds, meaning any losses would not be shared across the eurozone.
With deflation now a reality across the single currency area, and the unemployment rate stuck in double figures, the region faces the real prospect of getting stuck in the kind of spiral that it took Japan 20 years to conquer.
Draghi is a regular at the World Economic Forum. In a sure sign of a big policy move to come, he’s not planning to attend this year.
However, if anything, it’s the second event that will provide Davos delegates with the strongest sense of deja vu.
Early elections in Greece are again worrying policymakers.
Voters will decide Sunday whether to back Syriza, a radical left-wing party that wants to reverse austerity and tear up the terms of the country’s bailout programs.
German Chancellor Angela Merkel, and her finance minister, may well use the Davos stage to restate their opposition to renegotiating austerity programs or providing Greece with yet more debt relief.
It’s the prospect of a clash between those positions that some fear could trigger a Greek default, ultimately starting a process that forces the Mediterranean nation to abandon the euro.
The idea of money printing in Europe has been floating around in Europe for a long time.
Whatever the ECB unveils on Thursday, the risk is that it is too little, too late. The world’s other leading central banks — with the exception of Japan — are ending their QE experiments.
And Greece’s future has been in doubt since 2008.
Davos this year is supposed to be discussing “The New Global Context.” Europe, sadly, is still stuck in the past.
