Nor is there any reason to think things might change much soon. Although Mario Draghi, formerly ECB chief and ex-Italian prime minister, produced an impressive report last month suggesting ways the EU could use industrial policy to revive the economy, it may sit on the desks of the major capitals. The two big beasts, France and Germany, are saddled with weak governments whose clock is running down, making it improbable anyone will want to pilot the Draghi proposals through the continent’s delicate diplomacy.

Further reinforcing the policy inertia is the rise of radical populist parties, which is slowing the pace of change. The need of increasingly fragile governments to keep the populists at bay is making them even more reluctant to make the sweeping economic reforms needed to revive growth. French President Emmanuel Macron tried creating a more business-friendly economy with some bold reforms. Look where it got him.

All told, there’s little reason to expect the sort of demand-led inflation that the Fed is concerned about could resurface in Europe in the foreseeable future. However, the risk may not lie in the economy but in the continent’s febrile politics. Indeed, it may be with one eye on the populists that Vasle has aired his concerns. Like almost all developed economies, Europe’s population is ageing — which means it relies on immigrants to supplement what would otherwise become a declining workforce. Restricting immigration, a non-negotiable for the populists, would thus slow and possibly reverse economic growth.

Yet rather than factor that into their political programmes, Europe’s new challengers tend to go the other way, promising even more generous welfare states and higher wages. Such fiscal largesse amid economic contraction would ultimately fuel inflation. Although we have not reached that tipping point, the ability of governments to keep their budgets in balance while fending off siren songs from the political fringes is looking increasingly doubtful. Where governments have kept spending under wraps, as in Germany, they’ve often done it by cutting investment so deeply the economy ends up worse off. Needless to say, that only strengthens the appeal of the populists.

Europe therefore seems to be caught between economic contraction and fiscal expansion. For as long as that tension persists, the ECB will feel the need for vigilance.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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