The European Central Bank (ECB) announced a raft of policy measures on Thursday, March 10, intended to give a further boost to euro area economic performance. Most of these measures were unconventional and yet still precedented. The ECB lowered its main policy rates, accelerated the pace of its asset purchases, and widened the pool of assets eligible to be included in its purchasing program. It also renewed its program for targeted loans to banks that extend credit to the non-financial sector. The only new element was the rate of interest that the banks would pay to access credit that they could lend for investment. The question is whether that new wrinkle will make much of a difference. As is often the case, the answer depends less on the mechanics of monetary policy than on the magic of market ‘confidence’.
Tag / European economy
National Ownership is Moral Hazard
The grassroots politics that policymakers accept as necessary for success in the domestic context is viewed as a top-down failure in any other country. The question is whether these two views of reform politics are reconcilable. The answer depends upon two things. One is how much you see politics as a process of give and take between policy advisors, politicians and voters. The other is how much you trust politicians in other countries. Unfortunately, the debate in Europe right now is much more about trust than about process.
We Don’t Give Up
Mario Draghi reassured the markets at the 21 January press conference of the European Central Bank (ECB) by making it clear that the Governing Council is unanimous in its desire to reassess economic conditions at the upcoming March meetings and to reconsider its policy stance if necessary. He stressed that there is no limit to the action that the ECB can undertake to achieve its mandate. And he reiterated that whatever the actual policy decision in March, the ECB is already working to resolve any technical issues that might prevent it from using the full range of instruments at its disposal. The response in the markets was immediate. Bonds and equities rallied while the euro moved lower against the dollar – all good things from the ECB’s perspective. ECB watchers were cautiously optimistic. A few voices noted that the ECB had promised in October of last year only to under-deliver in December; this time actions should speak louder than words. So should results. Draghi has reiterated his July 2012 promise to do ‘whatever it takes’. What he did not say is that ‘it will be enough’. Instead, he insisted: ‘We don’t give up.’
More than Just debt
Europe’s Orphan: The Future of the Euro and the Politics of Debt. By Martin Sandbu. Princeton: Princeton University Press, 2015. 313 pp. $29.95. ISBN: 978-0-691-16830-2 (cloth).
The euro did not cause Europe’s economic crisis; policymakers did. By focusing too much attention on debt, by demanding that existing obligations be met in full (and creditors made whole), and by doing so against a backdrop of coordinated macroeconomic tightening, Europe’s policymakers ensured that the downturn in European macroeconomic performance would be deep, long, and destructive. These same policymakers only narrowly avoided disaster when they began to loosen monetary policy and to accept the need for some debt restructuring. Nevertheless, these efforts did not come soon enough, they were no comprehensive enough, and they were not applied consistently enough to prevent Europe from coming to the edge of disaster as elite macroeconomic ideology finally collided with the requirements for democratic legitimacy in Greece (and Germany) during the summer of 2015. This is the diagnosis Martin Sandbu offers to explain what went wrong.
Central Banking Divergence Means Market Volatility
There are three divergences in the art of central banking. The most obvious is between the monetary tightening expected in the United States and the loosening expected in Europe. A second divergence is between the prudential oversight of the banking system and the conduct of macro-economic demand stabilization – particularly quantitative easing. A third divergence is between the communication of forward looking policy intentions and the practice of monetary policy decision-making. Each of these divergences acts as a constraint on the conduct of monetary policy; the juxtaposition of all three increases the risk of significant market volatility.
Matteo Renzi’s Liberalism of the Left
Italian Prime Minister Matteo Renzi delivered his ‘Manifesto for 2016’ in a long speech to the parliamentary factions of the Partito Democratico on 3 November 2015. Il Foglio published an editorial on the manifesto some days later alongside a full text version of the speech. The paper also invited a few reactions from outside observers. The English-language version of my comment is below. The Italian-language version was published in Il Foglio this morning (10 November).
Continuing European Economic Vulnerability
The European Commission’s autumn economic forecasts paint a bleak picture. The headline is cautiously optimistic. European growth is moderating but should improve in the forecast period thanks to an accommodating monetary policy, a neutral fiscal stance, and a gradual relaxation of ‘headwinds’ coming from other parts of the globe. The analysis itself is more troubling. European growth relies excessively on external markets; price inflation will recover as commodity prices stabilize at low levels; and monetary policy accommodation in Europe contrasts with a gradual tightening in the United States with uncertain implications for market volatility and global capital flows. The bottom line is that things may get better and yet then again they may not. Although the authors of the forecast would argue otherwise, this is not a message that offers much hope.
What’s Wrong with European Economic Performance?
Pessimism is building across the euro area about economic performance. Growth has slowed in most euro area economies, even as inflation remains persistently low and unemployment persistently high. The question is whether to blame this poor performance on external factors or on decisions made by European policymakers. If this is just another patch of bad luck, then the only challenge is to batten down the hatches and ride it out. It would be more worrying, however, if Europe’s economic policymakers have set their economy sailing off in the wrong direction.
The easy answer is to blame the outside world. Growth in emerging markets is slowing. This is not only sapping demand for European exports but also pushing down commodity prices and increasing volatility in exchange rates. At the same time, other major economies are underperforming. The recovery in the United States is quicker than in Europe but it is still too uneven for the U.S. economy to help pick up slack elsewhere. Japan is much weaker. Worst of all, Europe is surrounded by tragedy. The human cost of violent conflict and desperate migration is all too apparent; what is less obvious is the toll on European businesses that have lost access to neighbouring resources, relationships and markets.
Erik Jones 