We’re asking too much of central banks – if we’re to boost the European economy, policymakers must step up

Cheap money seems here to stay unless moves are made to loosen fiscal policies, take action against monopolies and improve workers’ education and training

Whether or not the ECB decides to move right now, it is almost a foregone conclusion that policy will be eased still further in the months ahead (AFP)

This will be a week of high confusion in British politics, but one of a little greater clarity in European and global economics. Ultimately the latter also needs to be seen as an extremely important issue.

At some stage there will be an accommodation between the UK and the European Union. But the great challenge facing the economies of the developed world – how to boost growth in a world of very low interest rates – will remain.

On Wednesday the European Central Bank meets to consider whether to respond to poor economic data from the eurozone by easing monetary policy yet further.

Last month its board members were split as whether to provide more support. The minutes of their meeting, released last week, showed that they were worried about the possibility that the ECB forecasts for the European economy, already revised downwards, might still be too optimistic.

Whether or not the ECB decides to move right now, it is almost a foregone conclusion that policy will be eased still further in the months ahead.

This is important for the eurozone, for two of its three largest economies, Germany and Italy, contracted in the second half of last year, while the third, France, grew only slowly.

But it is also important for the world, for Europe has become a testing ground for whether cheap money can deliver sustained economic growth. It is now more than 10 years since the collapse of Lehman Brothers triggered the global financial crash. Yet while there have been reasonable recoveries in some countries, including the US, UK and Germany, the overall performance has been disappointing.

Yet despite its apparent ineffectiveness in boosting demand, cheap money seems here to stay. Interest rates seem set to remain low, or in the case of Europe negative, for the foreseeable future. While rates in the US have been pushed up a little, the markets now expect few, if any, further increases.

Here in the UK no increases are in prospect this year. The orthodox view of the central bankers is that while cheap money policies may not have achieved as much as was hoped, things would have been worse without them. The only reasonable assumption must be that global interest rates will remain low for several years to come.

A number of things follow from this. One obvious point is if there is a global downturn – and the current recovery this year becomes the longest growth phase since the Second World War – then the policy response will be more of the same. How effective that might be is another question, and a troubling one.

Another point is that the adverse effects of low interest rates, such as denying savers a proper return on their money, will continue to be deemed acceptable. Savers will have to find other ways of increasing their returns, but will also need to be more wary of investment schemes that promise better returns. Higher returns carry higher risks.

And a further point is that within the eurozone there will be tensions between the parts of the region that have shown reasonable growth and those, notably Italy, which have not grown at all.

None of this is to say that the ECB will be wrong this week if it signals it will take yet more measures to boost the eurozone economy. The issue is a broader one. Policymakers around the world need to ask themselves what other things they can do – aside from urging the central banks to keep pumping in more funds – to improve growth, and hence the living standards of all.

These might include loosening fiscal policies, taking action against monopolies, improving workers’ education and training, and so on. At the moment too much is being asked of central banks, as this week’s ECB meeting should remind us all.