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.
Tag / European economy
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.