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Trump shows eurozone cost of growth

Donald Trump, US president-elect, is espousing a position long held by ECB president Mario Draghi: monetary policy is not the whole solution. It’s time to start building.

Ever since the ECB began its programme of quantitative easing, Draghi has called for governments to implement policies to combat unemployment and kick-start growth, rather than relying on the central bank’s extraordinarily loose monetary policy to do the job. He has been relentlessly ignored.

However, Trump appears to be promising to create jobs and boost growth with vast infrastructure projects, if one can trust his statements so far. But markets appear to have taken him at his word. Equities are rising and the bond market is routing as investors bet on growth and returning inflation.

In the UK, chancellor Philip Hammond is preparing his Autumn Statement, promising a “fiscal reset”, generally also assumed to mean vast infrastructure spending. Long-delayed decisions on expanding airports and railways have been brought forward.

These seem like the sort of projects that might help to boost anaemic EU growth, which might, in turn, cut inequality, and allow the ECB to hit its inflation target — if only they were planned for the eurozone. Sadly for Draghi, there’s not much appetite for this sort of project within the single currency area, while some of the region’s largest economies are just heading into pre-election political paralysis.

The ECB has denied it will begin to taper its purchase programmes, but the calls are growing louder that the central bank’s extraordinary actions have run their course, and it is time to turn to fiscal policy. The voices that said that QE infinity was the new normal are dying away.

Even the slightest hint of an impending removal of the ECB’s monetary policy backstop has been enough to send shockwaves through the system and cause a spike in government debt yields. The market is well aware that asset prices have been artificially inflated by the central bank’s buying activities. The second it appears as though the pump will be removed, investors do their best to offload their positions, driving up the cost of new borrowing for governments.

So surely the time for structural reform and infrastructure investment is when governments can still borrow at what remain historically low levels. Eurozone governments must make the most of their opportunity while QE lasts. It should always have been seen as a mechanism to facilitate growth-boosting measures, not a growth-boosting measure in itself.

But it may already be too late. Trump’s seismic impact on the bond market spreads far beyond US Treasury yields. Government yields all over the world are climbing, in spite of the ECB’s continued support.

Then again, timing isn’t everything. Hammond’s fiscal reset will come in the middle of the revived Bank of England QE programme, but Gilt yields are 80bp higher than when the programme started. So much for monetary policy.

In any case, as Trump has demonstrated, embarking on a fiscal stimulus project drives up yields anyway — and, for many eurozone countries, would meet a cool reception from the ratings agencies. Perhaps the reason Treasury yields are climbing is less of a bet on growth, and more fear that under Trump the US will be unable, or unwilling, to pay its debts.

But while infrastructure investment is a costly and risky remedy, Trump has demonstrated its efficacy in boosting growth expectations before a shovel has even been lifted.

Trump is by no means a safe choice for president. His bombastic but thin-skinned temperament seems ill suited to diplomacy. His positions on the environment and on civil liberties do not inspire confidence. Economically, The Donald’s protectionist policies have won him no friends in the world of global finance and his penchant for dismantling financial regulation seems like playing with fire.

But perhaps governments around the world do have something to learn. Generating jobs and stimulating growth is an expensive business. Designing elegant incentive packages to bring the private sector into infrastructure has had extremely limited results. Governments simply doing the job themselves might be what is needed.

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