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MNI INTERVIEW: Euro Recession Possible By Mid-Year: Schularick

By Luke Heighton
     BERLIN(MNI) - Europe's economy could be in recession by the middle of this
year if coronavirus and Brexit combine with ongoing geopolitical uncertainty and
concerns over the outlook for the Chinese economy, economist Moritz Schularick
told MNI in an interview.
     "I'm not positive for 2020 and 2021. The reasonable prediction would be
that going forward returns on assets will be low," Schularick, a professor at
University of Bonn and expected to become a senior advisor to the New York Fed
on macrofinancial issues, said during the conversation in Berlin on February 24.
"There is also quite a long line of shocks and potential negative risks lined up
- the coronavirus, Brexit negotiations, uncertainties regarding the political
situation both within the U.S., and between the U.S. and other countries."
     Should the economic effects of the virus prove less long-lasting and severe
than feared, the loss of production could be made up. However, Schularick
cautioned: "There are questions about the trajectory of the Chinese economy even
if a pandemic is contained, and the uncertainty shock of that. I wouldn't be
surprised if we find ourselves in a recession in the middle of this year; it's
not at all to be excluded."
     He was sceptical as to whether the European Central Bank could do much to
address a supply-side shock to the euro zone, though there would, he said, be a
temptation to prevent any downturn spilling into the broader economy.
     "Clearly if this is the trigger for much more severe global growth slowdown
or supply-chain disruption there will attempts to stabilise the outlook by
saying they stand ready to support the demand side of the economy," Schularick
said, while expressing concern at the lack of firepower available to central
banks to fight the next recession.
     "More asset purchases within the fixed income space are probably on the
horizon," he said, "but the marginal benefits are simply not as big as they used
to be. You can still intervene in equity markets. The problem with all these
financial transmission mechanisms is that it's not clear how effective they are
- setting interest rates even more negative could eventually have the opposite
effect to ones intended."
     "Intervening in equity markets and making rich people even richer against
the current backdrop of populism and concerns, real or imagined, around wealth
and income inequality, puts central banks on a slippery slope," he added.
     "If the only policies that are left are those that have major
distributional implications, then you might say that, from a democratic point of
view, these are not choices that independent central bankers should make."
     Interest rates are likely to stay close to their current level for another
five years, but Schularick said that inflation could reach 2% within a decade
with more active fiscal policy, including in Germany, if it overcomes its
long-time commitment to a so-called "schwarze null", or balanced budget.
     "The schwarze null fetish is increasingly questioned. It will probably
change with the next government, and that could be very soon. The next
government will be a coalition, and will be one that is more fiscally active,"
Schularick said.
     Sentiment among German companies is "not good" he warned, with structural
problems and the changing nature of the global economy posing challenges to
Europe's largest economy.
     "Germany has done very well over the last 20 years exporting cars and
machinery to the rest of the world. The next 20 years are not going to be that.
In an environment of growing economic nationalism, the idea of running large
trade surpluses and investing those surpluses at mediocre yields in the rest of
the world, of exporting your way out of [trouble] is no longer valid."
     The next decade will instead, Schularick predicted, be one of domestic
investment: "We transfer 7-8% of GDP abroad every year, when we could use that
very well at home and in Europe. The good news for Europe is that there is
plenty of inefficiency, so there is quite some growth that can be unleashed."
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,MT$$$$,MX$$$$,M$$EC$,MFX$$$,MGX$$$]

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