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Friday, March 07, 2014

ECB stands firm but looks to wider measures

Over on his new Forbes blog, Open Europe’s Head of Economic Research Raoul Ruparel lays out his take on why the ECB decided to stand firm despite the apparent deflation threat,
“My feeling is that there are two broad reasons. The first being that the flow of data is mostly positive, and the second, more important factor, being that none of its tools are economically, politically or legally suited to tackling the low inflation environment in the eurozone.”
He concludes,
“All in all then, the tools at the ECB’s disposal are far from suited to helping push up inflation in the struggling countries and boosting lending to the real economy to help economic growth. This is not to say the ECB would never use them, but that are better suited to a deeper more acute crisis (such as a break-up threat) than the chronic long term malaise which the eurozone currently finds itself in.”
These are themes we’ve explored plenty of times on this blog so won’t rehash here.

But there were a couple of other interesting points to come out of ECB President Mario Draghi’s press conference though.

The first being his mention of a new dataset which the ECB is looking at, specifically the “the high degree of unutilised capacity” in the eurozone economy. This refers to the ‘output gap’, i.e. the amount by which GDP in the eurozone has fallen below potential GDP. As you might imagine, estimating such a gap is fraught with difficulty and estimates are notoriously revised retrospectively (for example before the crisis few economies were seen performing above potential despite huge financial, real estate and debt bubbles).

Why is this important? Well, it could be the first step towards a more firm GDP target on the part of the ECB. Admittedly, it’s a small step and a full GDP target is unlikely but it could be an interesting shift for the ECB which has traditionally focused more on inflation, money market and private sector survey data (such as the PMIs). As Draghi himself said, it also shows that monetary policy will stay looser for longer, even if the data improves, due to the large gap between actual and potential GDP. It will be interesting to watch how this one develops over the next few meetings and whether the ECB decides to put any more emphasis on this measure.


Jesper said...

The broken transmission mechanism combined with ultra-low interest-rates could in theory build up bank capital and might possibly eventually fix the transmission mechanism. However, given how senior bank executives act I'm more inclined to believe that it'll lead to larger bonuses and dividends. Might be time to try something different.

Savers tend to be reluctant to use capital for spending but spending out of interest earned is another matter altogether.
Might it ever be the time to try to get the savers to spend by increasing the interest-rate so that they'll spend the interest? Or is interest-funded spending less good than debt funded spending?

Rollo said...

ECB is standing firm on very wobbly ground

Anonymous said...

Whilst the Euro is being used in so many diverse economies there is no means of doing anything useful

Unknown said...

In deflation there is too much capacity and too many (in this case) Euros, therefore the cost of these Euros goes down. That the EU & ECB is still expanding debt, the mechanism for adding to the money supply, only exacerbates the problem. They raise taxes as well and this discourages consumption at every level. Until all of the excesses are destroyed, they can set their laughable inflation targets anywhere they want. If or when they finally overdo it, kiss your Euro goodbye.

Anonymous said...

And in the meantime, our politicians like Clegg say "Don't go backwards on Europe".

It is not us going backwards, it is the EU and the dreaded Euro. And given half a chance they will impose as much of the risk and cost of it all on us.

The lack of proper and timely action since 2008 just highlights the fact that the EU and MananaZone are paralysed by an incomplete series of corrective mechanisms and the political will to sort it out.

George Soros' comments this weekend about the German's attitude to economic policy and the future of the Euro just about sums it all up.

Free Trade. No sovereignty.


Anonymous said...

The ECB is a criminal enterprise that is part of the larger criminal enterprise called the central "banking" system.

The whole system is a cancer on the world, and it needs to be removed if the world is ever going to recover economically, spiritually, politically and in every other way.

Anonymous said...

The huge interest rates on the money lent to the failing economies of the eurozone will take decades to repay, all the time having a negative effect on the whole of the worlds economies.

Jesper said...

I had a brief initial look at the ECB manual for Asset Quality Review (AQR)...


Easy to get the feeling that it has been written by ivory-tower living academics...

There are some good things but seriously the heading: "
Valuation reflecting
hope value" must surely be a joke?

& in other assets they mention the asset of 'art' but forget the asset of the receivables ledger? How many SMEs have art approved as collateral, compared with how many SMEs have receivables?

I suppose that it is good that the manual is written, but it is very sad that there is such incompetence among finance professionals that it is needed.