Former Prime Minister Tony Abbott made more than a few gaffes during his time in office. But old habits, as they say, die hard. Overnight, Mr Abbott was at it again, making the kind of customary blunder he’s renowned for.
This time Abbott was doling out advice to European leaders on immigration. The EU is still coming to grips with the gravity of the situation. Hundreds of thousands of migrants have made their way into EU borders. Most are fleeing persecution and war. From war torn Syria, to Africa, and even the Balkans… Europe hasn’t seen migration on this scale since the Second World War.
The pressures of this crisis have led to a lot of soul searching. Handling the crisis is something EU leaders can’t find any common ground on. A few want an end to the Schengen Agreement (free borders). Some want migrants banned from entering Europe altogether. Others welcome the migrants, but with conditions.
Whatever your position on immigration, there’s no denying the economic benefits they bring. Europe, grappling with an economic crisis as well as a humanitarian one, needs them more than ever. Young, educated families from abroad can mask over Europe’s demographic time bomb. As an ageing continent, Europe has ever fewer taxpayers, and ever more money funding pensions.
We’re not talking about these benefits in detail though. I’ve covered that before, which you can read here. Instead we’re focusing on what Abbott said. Why he’s completely off the mark on this one. And why we should be learning from Europe, not the other way around. Here’s what he had to say (emphasis mine):
‘Implicitly or explicitly, the imperative to ‘love your neighbour as you love yourself’ is at the heart of every Western policy.
‘It expresses itself in laws protecting workers, in strong social security safety nets, and in the readiness to take in refugees. It’s what makes us decent and humane countries as well as prosperous ones, but — right now — this wholesome instinct is leading much of Europe into catastrophic error.
‘While prime minister, I was loath to give public advice to other countries whose situations are different. But because people smuggling is a global problem, and because Australia is the only country which has successfully defeated it — twice — our experience should be studied.
‘It will require some force; it will require massive logistics and expense; it will gnaw at our consciences — yet it is the only way to prevent a tide of humanity surging through Europe and quite possibly changing it forever’.
In other words, we’re all incredibly accepting of migrants. As long as we’re not left responsible for them, that is. It’s not the kind of thing you expect to hear from a one-time leader of a nation built on immigrants. Australia has long benefitted from migration stemming from Europe, Asia, and New Zealand.
What’s more, our two ‘successful defeats’ of people smuggling — a pejorative for immigrants — isn’t comparable to Europe.
One should remind Abbott that you can rarely fix two different problems with the same solution. Turning back boats and restoring border security is easier when you’re a lonely island at the far end of the world. So it’s unclear then what Europe should learn from Australia exactly.
Europe is connected by land to the Middle East and Asia. It’s a stone’s throw from Northern Africa. The only ‘saving grace’ for Europe is that there’s a desert buttressing it from sub-Saharan Africa. Either way, it has 5.4 billion people within walking distance of its borders. Telling Europe to follow our example is illogical, if not downright absurd.
Not only does Europe need these migrants for economic reasons, but Europe’s borders are porous. Protecting them is almost impossible. The US learned that with Mexico. And they only have one border to patrol.
Then there are the costs. The sheer scale of dealing with border protection in Europe is not something the EU can afford to waste money on. Especially as there’s little guarantee of any tangible success. There are just too many avenues into Europe for it to work.
The EU’s monetary policy — the real lesson
Instead of trying to teach Europe about border control, how about learning from them? There are lots of things we can glean from their experience —particularly on the economic front. The ECB’s handling of interest rates and quantitative easing (QE) stand out as the obvious lessons.
The EU, as you’ll no doubt know, is struggling economically. Measly growth has persisted for the better part of a decade. The last time it managed to top 2% growth was in 2010. Before that? 2007. As for the years in between, they read as follows: 0.5%. -4.4%. 1.8%. -0.5%. 0.1%. 1.3%. It’s the stuff of nightmares. Some countries, like Germany, saw stronger growth during this period. But on the whole, even 2% is a milestone of sorts.
Australia is at risk of going down the same road as the EU. In the first three quarters of the year, the economy grew by 1.6%. If GDP ends up as little in Q4 as it was in Q3 (0.2%), we’re facing the real possibility of sub-2% growth. That is bad enough — without mentioning the prospect of a recession too.
To combat its condition, the European Central Bank has done what central banks do. They slashed interest rates, which now sit at just 0.05%. It’s a stark contrast to 2008, when EU interest rates were above 4%. It’s been on a downhill slope ever since. On top of rate cuts, the ECB launched QE programs, buying up government bonds. And for what? Europe is still mired in an economic rut.
Last week the ECB president, Mario Draghi, suggested more QE was on the way. Why not? Interest rates can’t go much lower. Commercial banks have already started passing off negative rates onto customers. That’s why QE works when nothing else will. When lenders refuse to borrow at negative rates, just take over the whole operation yourself. Problem solved.
As everyone should know by now, loose monetary policy never does what’s intended. Sure, it pushes up asset prices, from stocks to property. That’s why markets and consumers love a regular dose of stimulus. But nothing changes. There’s hardly any effect on the real economy. All you find is more debt. Debt that can only be repaid with another round of credit expansion. It’s a pyramid scheme.
Australia is an active participant in this too, make no mistake. Every central bank around the world is. But instead of teaching Europe about handling migration, how about we learn from the failure of central bank policymaking?
What if instead we looked at Aussie interest rates of 2% and said ‘enough’? No more rate cutting, come hell or high water. Let’s rein in credit. Why not?
‘We can’t do that, it’ll ruin the economy. The currency would appreciate, hurting our exports. And just think of deflation…’
Deflation is every central banker’s worst nightmare. Most central banks aim for inflation of 2–3%. Anytime consumers expect prices to fall in the future, they hold back on spending. Which is a big no-no in the world of central banking. And they’ll do anything, like easing lending rates, to ensure this doesn’t happen.
Across the EU, core inflation fell 0.1% from a year earlier in September. The inflation rate has sat below the ECB’s 2% target since February 2013. Australia’s inflation rate meanwhile is 1.5%. That’s also below the RBA’s target of 2–3%.
The ECB’s proposed QE program is in part an attempt to stop deflation from spreading. But as history shows, the impact of this never lasts long. The ECB last pumped the EU with money in June. This was part of its government bond buying scheme. What happened? Inflation rose, as expected, up 0.3% from a year earlier. The month after, it fell 0.2%. Then it dropped to 0.1%. Then came the -0.1% fall in inflation. In other words, QE worked until it didn’t…
QE, and loose monetary policy in general, is a classic case of kicking the can down the road. At some point though, you come across that same can lying on the road. Central banks, invariably, can’t help but kick it again.
Aussie interest rates to fall again?
While the RBA is not considering QE, rate cuts are certainly on the agenda. Except that unlike the ECB, the RBA is worrying about inflation rising above 3%. It shouldn’t be though. Annual core inflation was unchanged at 2.4%.
In any normal situation, the RBA wouldn’t consider touching interest rates. But it remains keen to weaken the Aussie dollar and boost exports in turn. Only possible by lowering rates. With inflation still under control, the RBA may do just that. As early as next month. Either way, most experts forecast the cash rate falling to 1.75% by February.
So, before we lecture Europe on their problems Mr Abbott, let’s learn from them. When it comes to Australia’s interest rate policy, why is it always a question of ‘when’, not ‘why?’ What if we instead stopped increasing the burden of debt on public and private coffers by easing credit? We have nothing to teach Europe about immigration, because their problem is on a scale we can’t fathom. But Europe has plenty to teach us about conducting prudent monetary policy.
Well, it’s a nice idea anyway. But as long as central banks control monetary policy, the credit pyramid scheme will continue apace.
Contributor, Markets and Money
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