Suzanne Lynch: Sombre economic mood prevails at Davos

Europe Letter: All eyes turn to ECB as gathering ponders crucial week for euro-zone economy

The focus turned to the snowy Alpine resort of Davos this week as leading political and business figures gathered for the opening of the World Economic Forum.

What began as a casual business think-in established by a 32-year-old business academic in 1970 has morphed into the world's leading economics forum. Forty-five years later the founder, Klaus Schwab, is still chairman of the event, which attracts thousands of participants to the tiny Swiss village each year.

While for many the annual get-together is the epitome of first-world elitism it has emerged as an important place where campaigners can be heard. In recent years, Davos has offered a platform for advocates of social justice, climate change activists and leaders from emerging economies across Asia and Africa to try to shape the global economic and political agendas.

Given the terrorist attacks of recent weeks and the continuing Islamic State campaign in the Middle East, geopolitical concerns hang over this week’s events. But the economic mood has also darkened.


World leaders are meeting in Davos during a crucial week for the euro-zone economy.

Greek fallout

Today the

European Central Bank

is widely expected to announce a large-scale bond- buying programme. On Sunday, Greek voters will go to the polls. The following day, euro-zone finance ministers are to meet in Brussels for two days of meetings that are likely to be dominated by the fallout from the Greek election.

Events in Frankfurt and Athens in the coming days will have profound implications for the direction of euro-zone economics and politics. The ECB’s anticipated quantitative easing programme is for many a belated effort to take a more interventionist role in managing the euro-zone economy.

Having perceived its mandate primarily in terms of inflation control, the ECB is now, under its president, Mario Draghi, preparing to join other central banks around the world in launching a full-scale bond- buying programme. Since its establishment in 1999 the ECB has arguably emerged as the most important EU institution, eclipsing Brussels, Strasbourg and Luxembourg as the fulcrum of euro-zone power, with its decisions for its 19 members having implications for all 28 EU member states.

Today’s action will be one of the defining moments in the bank’s history, one that could have a profound effect on the medium- and long-term health of the euro-zone economy. Having left the worst of the sovereign debt crisis behind it, the zone has been plagued by falling inflation, high unemployment and low GDP growth.

Deflationary cycle

Today’s bond-buying programme is the most serious attempt by the ECB to deal with the economic fundamentals facing the zone’s economy, though the limited nature of the programme and the expectation that national central banks will buy the bonds of their sovereigns have left serious questions about its ability to stem the euro zone’s deflationary cycle and boost lending and growth.

The Greek election is equally significant in terms of its political and economic ramifications. Writing in the Financial Times, Syriza's leader Alexis Tspiras attempted to reassure the financial world his party is economically responsible.

"A Syriza government will respect Greece's obligation, as a euro zone member, to maintain a balanced budget, and will commit to quantitative targets," he wrote, adding that Syriza, as a new party, would stand up to vested interests and "make the reforms that Greece actually needs".

But his most persuasive argument was his invocation of the threat of far-right parties across Europe unless the euro- zone establishment begins to engage with the democratic outcome of the election: "We must end austerity so as not to let fear kill democracy. Unless the forces of progress change Europe, Marine Le Pen and the far-right will change it for us."

The message is clear: the social impact of austerity policies could have frightening political ramifications unless the establishment engages with the electorate’s needs.

Just a day after the International Monetary Fund cut its global growth forecasts for this year and next, the opening day in Davos was dominated by discussion of the economy. The head of the OECD urged the ECB to launch an unlimited bond-buying plan, while ex-Bundesbank chief Axel Weber appeared to underline the prevailing view in Germany by warning structural reforms by governments as much as ECB action were needed to fix the euro-zone economy.

Today it will be seen whether the ECB is really ready to do “whatever it takes” to save the single currency, as all eyes turn to Frankfurt.