Why QE in the Eurozone Is a Mistake
Paul De Grauwe and Yuemei Ji (“Quantitative easing in the Eurozone”, VOX, 2015) have argued that quantitative easing (QE) can occur in the Eurozone without fiscal transfers. This may be the case, but their analysis is fundamentally misplaced, as it is based on incorrect, incomplete or missing premises. We think it would be a mistake for ... Read more
The ECB Should Fully Use its Balance Sheet to Fight Deflation
The goal of this note is to support the view that the European Central Bank (ECB) should fully use its balance sheet to bring back inflation in the euro area to a reasonable level. It comprises four recommendations, which are drawn from an analysis of the monetary policy pursued by the ECB and by the ... Read more
The European Crisis – ‘Financial Poker’ Games!
Reviewing the borrowing costs of European nations, a visiting intelligent alien may conclude that the European economic crisis is over and rehabilitation complete. 10-year government bond rates for Spain, Portugal, Ireland and Greece are 2.20%, 3.12%, 1.67% and 6.15% respectively. Equivalent rates for Germany, France and Italy are 0.97%, 1.31% and 2.39%. Comparable rates for ... Read more
Euro Area – Q&A on QE
By Reza Moghadam and Ranjit Teja: As inflation has sunk in the euro area, talk of quantitative easing (QE)—and misgivings about it—have soared. Some think QE is not needed; others that it would not work; and yet others that it only creates asset bubbles and may even be “illegal.” In its latest report on the euro area, the IMF assesses ... Read more
The Euro Area Needs a Growth Stimulus Package
For several months, the outlook for the euro area has improved thanks to the positive results that have been achieved over the national and European level. Budget deficits have decreased considerably since 2011, particularly in the countries hardest hit by the crisis. Trade deficits of these countries have disappeared through fiscal consolidation and structural reforms ... Read more
Bundesbank Says Nein and Ja on Further ECB Accommodation
Germany appears to have capitulated. The Bundesbank has dropped its opposition to extraordinary measures, like ending the sterilization of the SMP bond purchases, and has even dropped its visceral opposition to QE, if it can be structured properly to keep within the ECB’s mandate. As Jurgen Stark’s recent op-ed piece in the Financial Times makes clear, this ... Read more
Squaring the Circle: A QE for the ECB
The European Central Bank is in a pickle. The pillars of monetary policy, money supply growth and inflation, are crumbling. The main interest rate it influences, the repo rate, is already at a lowly 25 bp. Excess liquidity is trending lower as European banks returned funds borrowed under the Long Term Repo facility. This is ... Read more
Revisiting Banking Union in a Single Currency Area (Part 2)
The current banking union framework remains far from ideal if the currency union dimension is taken into account. While decisions so far have been focusing on the moral hazard of banks, these measures fail to solve an additional market failure in the Euro area caused by the moral hazard of governments competing on funding costs, ... Read more
Evidence of Hampered Monetary Policy Transmission Channel in the Euro Area
Mario Draghi cautioned on the ‘hampered’ transmission channel of monetary policy in his now famous London speech last week: To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate. I referred to the clogging of rates policy back in April via ... Read more
ECB Rates Policy is Clogged in Key Periphery Markets
How the Euro area (EA) will grow, according to Mario Draghi: The outlook for economic activity should be supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area economy. In this post, I address Draghi’s point that the ... Read more