UBS Chairman: Monetary and Fiscal Policy Won’t Save Europe

European Union

The realization that the U.S. may very well end its much discussed asset purchase program, known as quantitative easing, might prompt Europe to do some soul searching for effective policy making. Central banks have been stretched to their creative limits, and monetary policy as an alternative to sound economic management is proving to be somewhat of a fallacy.

UBS (NYSE:UBS) Chairman and former European Central Bank Governing Council member Axel Weber told Bloomberg that the impetus is on European governments now to rectify their own economic shortcomings. “Monetary policy has reached the limit of what it can do. Fiscal policy has probably also reached a limit and that’s where I think the Europeans now really need to enact those growth agendas,” he said.

Historically low interest rates from the European Central Bank under Mario Draghi haven’t exactly spurred lending as was imagined, with borrowing rates in the periphery countries continually rising, making it harder for growth to find a foothold in the weaker economies. The stress is felt at the upper echelon as well — France continues to battle recession, and Germany faces the prospect of growing at less than one percent this year. This economic malaise throughout the bloc has ultimately prompted the International Monetary fund to recalculate their growth estimates for Europe, down from 0.1 percent, which was already negligible — with the organization now saying that it underestimated the depth of the European recession.

Political gridlock hampers the kind of growth-oriented policies that Weber and others have called for, as unpopularity over privatization and bailout conditions fracture governments in struggling countries. Greece failed to meet the terms of its bailout with the ‘troika’ of lenders which IMF is a part of — the others being the EU and the ECB — though ultimately the European Union wouldn’t let its problem child go bankrupt, and issued a payment to prevent Greece from defaulting on its obligations.

Portugal faces continued questions of whether or not it can payback current bond holders, as rates have spiked since the tapering of quantitative easing was announced by Federal Reserve Chairman Ben Bernanke on June 19. While the government maintains it can pay obligations to investors come September, doubts have since arisen about the ability of the country to return to the market in upcoming years. Debates over austerity there have led the coalition government to stagnate, with the head of the minority party announcing his resignation. President Anibal Cavaco Silva approved a new coalition last Wednesday.

As the U.S. takes steps to facilitate its own recovery, the developing world — and the receding world in the case of Europe — face tough questions about the effectiveness of their governments’ ability to tackle economic problems. China is also facing a slowdown, bracing for the slowest growth in 23 years, and the government there is looking to an increased dependence on domestic consumption as a model for future prosperity. The Chinese central bank will let rates rise to encourage firms to consolidate over bloated businesses, since global demand cannot support the rate at which China was growing. This leaves Europe and others in a precarious situation, as all eyes are on them find the road to recovery.

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