Will the Euro Area be able to reform itself ? Macron/Merkel proposals are fight en by a group of countries led by the Netherlands. They refuse any cooperative instrument in the management of the Euro area.
On July 26, 2012 Mario Draghi said that the political construction of Europe was the most important element of the European architecture. He said, the most important in Europe is people’s will to live together. The euro currency was then just an instrument that supports this political construction.
With the reaction to the Macron/Merkel proposals, I am no longer sure of Mario Draghi’s assertion on the living together hypothesis.
The ECB has dramatically changed its monetary policy. The Asset Purchase Programme (APP) will stop next December. The amount that will be bought by the ECB will be halved after September to EUR 15bn.
The ECB will continue to invest the proceeds of its portfolio. It will guarantee the liquidity of the market and maintaining rates at a low level.
The ECB said that rates will not increase before the end of summer 2019.
Wait and see attitude of the #ECB in the management of its monetary policy. This is a sequel of the cyclical inflection observed since the beginning of the year. Is it permanent or temporary? The answer to this question is essential but it is still discussed by economists.
The ECB does not show a strong will to quickly change its strategy. That’s why we should not be surprised if asset purchases continue beyond the date of September 2018. The central bank is supposed to stop buying assets if the inflation trajectory is consistent with the monetary authorities’ expectations. This will probably not be the case. Moreover, by not creating the idea of a rapid break, the ECB should allow the euro to depreciate against the greenback. This would have a stabilizing effect on the eurozone economic outlook. This is all the more likely as the Fed will be much more active in countering the destabilizing effects of Donald Trump’s fiscal policy.
World growth stepped up a pace in 2017 as a result of a policy mix that was heavily on the side of demand, while effective monetary accommodation worldwide combined with loose fiscal policy to further drive this recovery.
This extra demand had a positive impact on manufacturing activity in particular, leading to a recovery in world trade.
This upswing turned the trend around in the sector in the euro area as well as in France, where job trends displayed a shift, stabilizing and even improving in 2017 after several years on a downtrend, if we include temporary employment in the sector. There was also a knock-on effect on services, pushing up overall activity overall.
Central bankers are very attentive to the unemployment rate even if it is for different reasons. In the US, Janet Yellen’s main target was the unemployment rate and she drove the USA economy to full employment at the end of her mandate. Mario Draghi doesn’t focus too much on the unemployment rate during his press conferences. But when we look at low inflation pressures in a Phillips curve we can anticipate that the equilibrium unemployment rate is lower than what we previously thought. It will have to be lower than now to generate inflation pressures.
The comparison of the US and EA unemployment rates is amazing as they follow the same post recession trend Continue reading
The minutes of the ECB’s March meeting reflect the central bank’s confidence in economic activity conditions in the euro area. The most noteworthy point reflecting this perception is the removal of APP easing bias i.e. the reference to increasing the asset purchase program if necessary. The bank no longer thinks that economic momentum will require emergency intervention. However, uncertainty remains on inflation trends and the ECB continues to insist that the ongoing reduction of economic slack would allow inflation to converge towards the central bank’s aim. March 2018 projections are still far from the 2% target even in 2020, when headline inflation is only expected to come to 1.7%.
“To reduce the European unemployment rate, the ECB must copy the Fed’s behavior”
Growth in the euro area picked up considerably in 2017 coming out at 2.5% vs. 1.8% in 2016, and hitting its highest point since 2007. The ECB played a lead role in this economic improvement: its policy of keeping interest rates very low by maintaining the main refinancing operations rate at 0% and via its asset purchase program on longer maturity securities was very effective.
These moves helped encourage Europeans to spend now by reducing the incentives to hang onto their wealth and spend it later, and in this respect, ECB President Mario Draghi skilfully steered the situation. The growth we are currently witnessing is driven by private domestic demand i.e. household spending and investment.
Yet unemployment remains high in the euro area, standing 1.4 points above end-2007 figures, when it came to 7.3%. This means that growth has not yet fully completed its upward adjustment. Continue reading