Raj Shant, portfolio manager of the Newton European Higher Income fund, reacts to the European Central Bank's latest approach to help the struggling eurozone.
The western world has lived beyond its means for decades and we have witnessed activities the likes of which the human race has never seen before: we have built up expensive welfare and entitlements systems and we have had a 30 year debt super cycle where the debt in the economy grew steadily.
Since 2008 we have seen the precariousness of our financial system, our government finances and the illusory nature of standards of living financed by ever greater borrowing. Yet, in an effort to stave off the full impact of concerted deleveraging, governments have taken on more debt to offset household and bank deleveraging.
For nearly three years the eurozone has been at the “bleeding edge” of global deleveraging. Is this because it is more leveraged than the UK or the US? Well certain countries are, and the banking system is, but it is not true that in totality the eurozone is more leveraged.
Newton's Shant reacts to ECB action
The crucial difference is in the nature of the central banks. The Bank of England and the US Federal Reserve have resorted to aggressive quantitative easing: printing lots of money to buy assets from the markets. The ECB not only refuses to do so, it is forbidden by its founding charter from doing so.
This has meant that as countries in the eurozone do not have control over their own money supply, their central bank is external to their economies. Rather like being on the gold standard, when the money supply in a country was determined by the amount of gold in the country.
Of course, the experience of the 1930s shows indisputably that countries that stayed on the gold standard the longest suffered the worst deflation and depressions. Hence, it can be no surprise that parts of southern Europe are slipping inexorably towards deflation and potentially depression.
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