{"id":3997,"date":"2019-08-06T07:50:20","date_gmt":"2019-08-06T07:50:20","guid":{"rendered":"http:\/\/euromenaenergy.com\/?p=3997"},"modified":"2019-08-06T07:50:20","modified_gmt":"2019-08-06T07:50:20","slug":"ecb-loosening-is-not-enough","status":"publish","type":"post","link":"https:\/\/emimer.com\/?p=3997","title":{"rendered":"ECB loosening is not enough"},"content":{"rendered":"<div class=\"article__abs u-mt-se\" dir=\"ltr\">\n<p>The European Central Bank&#8217;s negative interest rates and quantitative easing measures cannot by themselves address the pervasive risk aversion holding back the eurozone economy. Eurozone policymakers must, therefore, find the political will to design a comprehensive package of financial and fiscal measures aimed at injecting new energy into the European project.<\/p>\n<\/div>\n<div class=\"article__body article__body--commentary english\" dir=\"ltr\" data-page-area=\"article-body\">\n<p data-line-id=\"dfc45c5d0160416d92296409646dd7d6\">LONDON \u2013 If indications of disappointing economic growth in the eurozone are confirmed, the European Central Bank will loosen monetary policy further in September. Last week, outgoing ECB President\u00a0Mario Draghi\u00a0signaled\u00a0a further likely cut in the ECB\u2019s rate on commercial banks\u2019 overnight deposits with the central bank, which is already -0.4%. In addition, the ECB is discussing a new program of asset purchases.<\/p>\n<p data-line-id=\"0bca8267f96f419299762c681bf18491\">Economic stimulus is clearly needed. Annual inflation is\u00a0well below\u00a0the ECB\u2019s target of \u201cclose to, but below 2%,\u201d and financial markets expect it to remain so for years. What\u2019s more, the eurozone has grown more slowly than the US economy since the 2008 global financial crisis. Growth has flagged since peaking in the third quarter of 2017, and\u00a0slowed again\u00a0in the second quarter of this year.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"16c2c6d989ee4129a00e01f1481c2ada\">It is also clear that national governments in the eurozone are reluctant to provide a coordinated fiscal stimulus, despite the urgings of the ECB and\u00a0many economists. Willingly or not, the ECB remains the only game in town.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"2b88465bf4964c0587a110e9854b3e15\">The question is whether monetary policy alone can help to improve real growth and the inflation outlook in the eurozone. Monetary policy can be a powerful tool. The key to President Franklin D. Roosevelt\u2019s successful effort to revive the US economy in the 1930s was not deficit spending, but rather the large monetary stimulus resulting from America leaving the gold standard before continental European countries did. Today, the ECB needs to engineer something similar with different tools.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"12a4d5b6438244fb8889d1e20e40fac7\">In principle, taking the ECB deposit rate further into negative territory should remove the restriction on future expected short-term interest rates turning negative, and therefore flatten the forward yield curve. A rate cut should also put downward pressure on the euro\u2019s exchange rate, potentially making eurozone exporters more competitive.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"ab3715a00f834529b535e579a01dcf31\">But such a move would be controversial, in particular because it would dent the profitability of banks that cannot pass on negative ECB deposit rates to their customers. Such policies have heterogeneous effects across banks, and mitigating action, although feasible, requires complex engineering.<\/p>\n<div class=\"small-12 medium-10 medium-offset-1 large-8 large-offset-2 xlarge-6 xlarge-offset-3 cell u-mt-se\">\n<div class=\"article__body article__body--commentary english\" dir=\"ltr\" data-page-area=\"article-body\">\n<p data-line-id=\"7a0b68710c524f6cbcc96041a513f3b5\">According to an\u00a0analysis\u00a0by the ECB\u2019s staff, \u201cstrong\u201d eurozone banks are able to pass on negative rates to their corporate clients; \u201cweak\u201d banks cannot.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"9b0b1d14a2e5432ab49e9439bba8f639\">The ECB is therefore considering ways to mitigate this \u2013 in particular by granting very favorable conditions on the special loans that it will offer under the TLTRO III program, which are likely to be taken by the \u201cweak\u201d banks. In addition, a tiering system is being considered in which reserves below a certain threshold would not be subject to negative rates. But this is likely to benefit the strongest banks of stronger core eurozone countries such as Germany, France, and the Netherlands, which together hold about one-third of total deposits at the ECB.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"a01303eb53c24ccf89c8dae201aeac0b\">Beyond these technical considerations, policymakers must grapple with two root causes of excess demand for central-bank reserves among strong eurozone banks. One is very high demand for safe assets in general \u2013 and banks in core eurozone countries have little incentive to hold their own governments\u2019 debt when the interest rate is below the ECB deposit rate. Another cause is the segmentation of the eurozone\u2019s interbank market, which, if the ECB implemented tiering, would prevent strong banks from benefiting from arbitrage opportunities by lending to weak banks at a rate above -0.4%. Both causes are the result of the eurozone\u2019s dysfunctional banking system, in which demand for safe assets involves both a \u201chome bias\u201d and a strong demand for core countries\u2019 sovereign debt.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"b1122cd0e1184ed89a47592b59a9c211\">In these circumstances, the ECB will not find it easy to implement a policy that would remove the constraint of the zero lower bound on interest rates, while ensuring that the policy\u2019s distributional effects on banks and EU member states are neutral. Doing so will involve many instruments and complex design, far from the simple one-tool-for-one-target framework that was best practice before the financial crisis.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"d8f2a85305ad4d288a5f0ec8926cea97\">Moreover, negative rates become less effective over time and, if protracted, may have undesirable effects \u2013 for example, by inducing savers to de-risk, thereby potentially generating asset-price bubbles and increasing financial disintermediation. The positive stimulus from the depreciation of the euro\u2019s exchange rate could offset these effects, but only if other central banks \u2013 and in particular the US Federal Reserve \u2013 do not ease at the same time. And on July 31, the Fed announced a widely expected quarter-percentage-point cut in its benchmark interest rate, while further future cuts cannot be excluded.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"5c085e14bc624825853461906d2024a3\">But the main problem is that neither negative rates nor quantitative easing can by themselves address the pervasive risk aversion holding back the eurozone economy. The ECB is trying to discourage demand for safe assets by making them more expensive to hold, but it cannot address the causes of the increase in such demand. This is a global trend driven by several factors, including demographic changes, widespread uncertainty linked to technological transformation, and political risks such as trade wars and nationalism. But in the eurozone they are exacerbated by the lack of reform of the single currency.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"91119848d22b4c72a7db54c41376f931\">More than ten years after the financial crisis, the eurozone\u2019s financial markets are still fragmented, and the supply of safe assets is limited by the conservative fiscal policy of northern European countries, particularly Germany. Eurozone policymakers must, therefore, find the political will to design a comprehensive package of financial\u00a0<em>and<\/em>\u00a0fiscal measures aimed at injecting new energy into the European project. Such a combined approach is essential to address the deep-rooted risk aversion sapping growth across the eurozone.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"4ee5292b29074c44b468c57a647e4aea\">In the 1930s, America\u2019s key stimulus was monetary rather than fiscal, but a vital ingredient of success was a comprehensive set of reforms coupled with a strong message capable of unifying the country. Today, Europe needs a twenty-first-century version of that policy.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<\/div>\n<\/div>\n<aside class=\"small-12 medium-10 medium-offset-1 large-8 large-offset-2 xlarge-6 xlarge-offset-3 cell u-mt interaction--hideable printable\" data-page-area=\"article-bottom\">\n<div class=\"u-mb\" data-id=\"lucrezia-reichlin\">\n<div class=\"nmd-item\"><a class=\"track-event avatar-wrapper\" title=\"Profile of Lucrezia Reichlin\" href=\"https:\/\/www.project-syndicate.org\/columnist\/lucrezia-reichlin\" data-entity-type=\"member\" data-entity-id=\"52e6646f4a4231122c3b7e2d\" data-language=\"english\" data-event-action=\"click\" data-entity-link-name=\"lucrezia-reichlin\" data-href-original=\"\/columnist\/lucrezia-reichlin\"><img decoding=\"async\" class=\"avatar lazyloaded\" src=\"https:\/\/webapi.project-syndicate.org\/library\/19d553ee44413f734452f931ec66b7ab.square-small.1.png\" alt=\"Lucrezia Reichlin\" data-src=\"https:\/\/webapi.project-syndicate.org\/library\/19d553ee44413f734452f931ec66b7ab.square-small.1.png\" \/><\/a><\/p>\n<div class=\"name-wrapper\">\n<h2 class=\"nmd-item__name\"><a class=\"track-event\" title=\"Profile of Lucrezia Reichlin\" href=\"https:\/\/www.project-syndicate.org\/columnist\/lucrezia-reichlin\" data-entity-type=\"member\" data-entity-id=\"52e6646f4a4231122c3b7e2d\" data-language=\"english\" data-event-action=\"click\" data-entity-link-name=\"lucrezia-reichlin\" data-href-original=\"\/columnist\/lucrezia-reichlin\">LUCREZIA REICHLIN<\/a><\/h2>\n<div class=\"meta meta--block\">\n<p>Writing for PS since<strong>\u00a02014\u00a0<\/strong><br \/>\n<strong>16<\/strong>\u00a0Commentaries<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/aside>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The European Central Bank&#8217;s negative interest rates and quantitative easing measures cannot by themselves address the pervasive risk aversion holding back the eurozone economy. Eurozone policymakers must, therefore, find the political will&#8230;<\/p>\n","protected":false},"author":1,"featured_media":4002,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[17],"tags":[46,48,57,68,76,77,82,86,87,90,96,99,103,107,109,111,113,137,139,146,148,160,174,183,184,201,202,209,222,230,232,233,244,246,249,256,262,263,267,277,279,280,285,288],"class_list":["post-3997","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-aramco","tag-athens","tag-baroudi","tag-carbon","tag-climate","tag-climate-change","tag-co2","tag-cyprus","tag-decarbonising","tag-democracy","tag-doha","tag-eastmed","tag-egypt","tag-embargo","tag-emissions","tag-energy","tag-energy-peace","tag-gas","tag-gazprom","tag-greece","tag-greenenergy","tag-international-maritime-disputes","tag-lebanon","tag-maritime-boundaries-east-mediterranean","tag-maritime-disputes","tag-offshore","tag-oil","tag-opec","tag-pollution","tag-poverty-alleviation","tag-putin","tag-qatar","tag-rosneft","tag-roudi","tag-russia","tag-saudi","tag-solar","tag-solar-power","tag-straddling-hydrocarbons-reserves","tag-total","tag-trump","tag-turkey","tag-unclos","tag-usa"],"_links":{"self":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/3997","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3997"}],"version-history":[{"count":0,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/3997\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/media\/4002"}],"wp:attachment":[{"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3997"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3997"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3997"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}