Attention on Greeks and Swiss for differing reasons
This will be a big week for Europe. We have had the prelude, the removal of the cap on the Swiss franc against the euro, which led to some sore heads among investors. Now come the main two events. The first will be the action by the European Central Bank (ECB) to stave off further deflation across the eurozone, which will be announced after the ECB council meeting on Thursday. The second will be the Greek general election next Sunday.
It is all linked. Funds were flooding into Switzerland as a safe haven, in advance of the ECB decision which was expected to depress the euro. This was creating money management problems for the Swiss authorities, so the central bank did a 180-degree about turn on policy. Instead of trying to hold the Swiss franc down it decided it had to let it go.
The result, an immediate 30% appreciation of the currency, will create obvious problems for Swiss exporters and the tourist industry. If you have booked a skiing holiday in Switzerland you will, I fear, be in for a disagreeable shock, though there may be the compensation of rather fewer people in the lift queue.
The soaring franc will also have the side-effect of increasing the cost of attending the Davos conference, which gets going this week - though maybe we should not feel too sorry for the delegates themselves as it will be their shareholders and taxpayers who will be footing the bills.
But does one currency suddenly leaping really matter? In itself, not that much. The franc is a classic safe haven, a bit like gold, but this is an economy of 8.3m people. It will be difficult but the country has a long tradition of currency appreciation and it will cope. Investors are affected and money is now flooding into the dollar, but in global terms all this is much less significant than, say, the plunge in the oil price.
It matters, however, in one respect: it shows that policy can change overnight. Apply this thought to the euro. It would be much more difficult to leave the euro than simply unpeg from the euro, but as and when something big happens to the eurozone, this will be the way it comes out. There will be a sudden announcement at a time when no one expects it, and the rest of us will all think: gosh, why did we not see this one coming?
The ECB plan for full-blown quantitative easing, by contrast, is at the other end of the scale. We have seen this one coming for months, the only questions being of timing, scale and mechanism. Whether it will work is another matter. QE has been running for five years now in the United States and UK so we have some experience of it.
We know it works in three main ways: it cuts effective interest rates for bank lending; it boosts asset values; and it pulls down the currency.
But the rise in bank lending has been quite limited in the US and UK, and while equities in the US and property in the UK have done well, it is not clear that this experience will translate to the eurozone. A paper by Janet Henry at HSBC makes the point that the detail of the plan will matter a lot but in any case the most likely positive impact of ECB action will be through a lower euro. That is already happening: so skiing in France or Italy, not Switzerland. Whether a lower euro will do much to increase demand, though, is an open question.
As for the other big event of the week, the Greek election, there are two points to be made. One is that a large majority of Greeks want to keep the euro. The other is that Syriza, the leftish party led by Alexis Tsipras and current frontrunner in the polls, has been broadening its appeal by naming moderate non-political figures on its list of candidates. Mr Tsipras has himself pledged to retain the euro and the message is that he will negotiate better terms in the next round of talks with the EU about Greece's debts, rather than act in any destructive manner. That is in everyone's interest. Nothing is for ever, but the message is that the eurozone will hold together for a while yet.
I think that is right. Assuming the ECB's plan meets the not-very-high expectations, and assuming Greece negotiates an acceptable further bail-out, the European economy plods on. There will be a net injection of real demand from the lower oil price, which should push growth up above 1 per cent this year.
The trouble is, this is not great. If 1%, or even 1.5%, growth counts as success, what on earth would failure look like? With the US and UK managing around 3%, the contrast between the English-speaking developed world on the one hand, and Europe and Japan on the other, has never been greater.
It is an important week for Europe, but it would be wise to have low expectations.