Stefan Gerlach is Chief Economist at EFG Bank in Zurich and Former Deputy Governor of the Central Bank of Ireland. He has also served as Executive Director and Chief Economist of the Hong Kong Monetary Authority and as Secretary to the Committee on the Global Financial System at the BIS.
The European Central Bank is now signaling its intention to end quantitative easing this year, indicating that it expects eurozone inflation to reach its target of „below, but close to, 2%.“ But as the ECB prepares for the next crisis, it would be well advised to revisit its longstanding price-stability objective.
ZURICH – The European Central Bank’s recent announcement that it will try to end asset purchases by this December means that it has confidence in its ability to achieve price stability. But those who decided that price stability should be the ECB’s single, overriding policy goal may have shot themselves in the foot, not least by denying policymakers much-needed flexibility.
The ECB defines price stability as inflation “below, but close to, 2% over the medium term.” That is a lower inflation rate than even the Bundesbank achieved during its celebrated pre-euro history, and it is a tighter target than virtually all other central banks pursue. For some, too much of a good thing is apparently wonderful. Den Rest des Beitrags lesen »
Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.
Robert Skidelsky, Project Syndicate
Cryptocurrencies promise to realize Friedrich Hayek’s dream of a free market in money. But human societies have discovered no better way to keep the value of money roughly constant than by relying on central banks to exercise control over its issue.
LONDON – Slumps have always been boom times for monetary experiments, and the economic collapse of 2008-2009 was no different. Underlying this recurrence is the instinctive feeling that economic calamities must have monetary causes, and therefore monetary remedies. There is either too much money, which causes inflation, or too little, which leads to depression. So the aim of monetary reformers –among whom are always a large number of quacks and cranks – has been to “keep money in order” and prevent its gyrations from disturbing the “real” economy of production and trade.
Bloc’s economy appears to have slowed, coinciding with mounting tensions over trade and the strength of the euro
A general view of the European Central Bank under dark clouds in Frankfurt, Germany. Analysts have in recent weeks dialed back their forecasts for when the ECB might increase short-term interest rate.
FRANKFURT—Trade disputes and a stronger currency are threatening a hard-fought economic recovery in the 19-nation eurozone, potentially delaying a move by the European Central Bank to follow the Federal Reserve in increasing short-term interest rates.
Trade conflicts are a particular concern for the ECB because the region escaped the lingering effects of its debt crisis in part due to the strength of its export sector. Den Rest des Beitrags lesen »
Mario Draghi warns of a peak in the growth cycle, while Jens Weidmann says Germany ‘is still booming’
European Central Bank President Mario Draghi, left, Deutsche Bundesbank President Jens Weidmann right
WASHINGTON—Two of the European Central Bank’s most influential officials offered differing interpretations of an apparent slowdown in the eurozone economy, highlighting the thorny decisions facing the bank as it prepares to draw a line under a decade of easy money just as growth softens.
Speaking at a gathering of finance ministers and central bankers here Friday, ECB President Mario Draghi warned that the eurozone’s growth cycle may have peaked, and suggested his bank would move only slowly to phase out its large monetary stimulus.
Across town, Jens Weidmann, president of Germany’s central bank, acknowledged signs of a slowdown in Europe’s largest economy in the first quarter. But Mr. Weidmann played down the change, suggesting he would continue to press the ECB to phase out easy money soon.
“There’s no reason to see a turning point in growth—Germany’s economy is still booming,” said Mr. Weidmann, who also sits on the ECB’s 25-member rate-setting committee. Den Rest des Beitrags lesen »
Mario Draghi has less than two years to devise an exit strategy from today’s extraordinary monetary policy.
The economic crisis in Europe is finally fading, and Mario Draghi and his colleagues at the European Central Bank can breathe a sigh of relief. Their strategy of negative interest rates and asset purchases is paying dividends. But now the recovery brings fresh headaches for Mr. Draghi. It will soon be time to start the complex task of unwinding the extraordinary and unconventional monetary stimulus that has resuscitated the economy.
The immediate problem facing Mr. Draghi is how to phase out the ECB’s asset-purchase program,known as quantitative easing or QE, and then gradually return interest rates to more normal levels. And that is only the beginning.
The ECB’s balance sheet has doubled in size over the past three years. This is partly as a result of QE. But it is also reflects the €750 billion of cheap fixed-rate, long-term funding that the ECB has lent to banks. In some respects those loans, known as TLTROs, are an indirect form of QE, with the ECB lending the banks cash and the banks buying bonds. Either way the ECB is printing money and its balance sheet is increasing. That balance sheet will eventually have to shrink back to more normal levels. Den Rest des Beitrags lesen »
Jens Weidmann has cautiously toned down his criticism of ECB policies in recent months as the economy has picked up
Jens Weidmann, president of the Bundesbank, said Tuesday that ending the ECB’s easy-money policies will “take quite some time.”
FRANKFURT—German Bundesbank President Jens Weidmann gave the clearest sign yet that he hopes to succeed Mario Draghi as president of the European Central Bank next year, suggesting he won’t be held back from applying for the job by reservations over the bank’s bond-buying program.
A candidacy from Mr. Weidmann, a 49-year-old former adviser to Chancellor Angela Merkel, would likely be supported by Berlin but opposed by some governments in Southern Europe, who have chafed at the German’s criticism of their spending habits and opposition to key ECB stimulus programs.
Mr. Weidmann’s predecessor as president of Germany’s central bank, Axel Weber, was the favorite to take over the ECB’s top job until he resigned unexpectedly in early 2011, clearing the way for Mr. Draghi to take the helm. Mr. Weber said at the time that he was worried about having to represent views he didn’t agree with on important ECB policies, including its government-bond purchases. Den Rest des Beitrags lesen »
Unlike before the 2011-2012 crisis, the eurozone seems to be locked in a benign credit cycle, in which lower risk premia allow both banks and governments to refinance at lower rates, more credit is available for the real economy, and the resulting recovery increases government revenue. But how long can this cycle persist?
BRUSSELS – During the 2011-2012 euro crisis, the currency area became mired in a “doom loop,” in which weak banks in financially distressed countries rationed credit, causing a recession that intensified pressure on government finances, which were already burdened by the need to cover banks’ losses. But such self-reinforcing spirals can also operate in the opposite direction. Understanding these dynamics may be the key to determining the eurozone’s relative strength today.
In a doom loop, the expectations of default drive up risk premia until the economy reaches the brink of collapse, even if the underlying problems could be managed over time. At a certain point, when the gulf between financial-market pessimism and economic reality becomes too large, the market becomes ready for a reversal. Den Rest des Beitrags lesen »
Investors are very optimistic. But two analysts think they may be ignoring a big risk
WHAT is in store for economies and markets in 2018? Around this time of year, a large number of analysts and fund managers are giving their views. Among the most interesting and thoughtful approaches can be found at Absolute Strategy Research (ASR), an independent group founded by David Bowers and Ian Harnett.
ASR adds extra depth to its analysis by contrasting its own views with those of the consensus. To do so, the group polled 229 asset allocators, managing around $6trn of assets, for their views on the outlook for economies and markets. They found a groundswell of optimism; the probability of equities being higher by the end of 2018 was 61%, and that shares will beat bonds is 70%. The allocators think there is only a 27% chance of a global recession. And they are not worried about the prospect of the Federal Reserve pushing up interest rates.
There are some disconnects within the consensus view. The first is that investors expect volatility (as measured by the Vix) to rise next year. Usually, equities struggle in such circumstances. The second disconnect is between their views on the business cycle and those on the stockmarket; since last year, their optimism about the former has reduced while their bullishness about the latter has increased. A third disconnect is between their views on high-yield or junk bonds and equities. Normally, the two asset classes perform well at the same time. But investors are unenthusiastic about junk, preferring the debt issued by emerging market governments. Den Rest des Beitrags lesen »
Few would disagree that it was necessary to slash interest rates in the immediate aftermath of the 2008 global financial crisis. But after a decade of ultra-loose monetary policies across advanced economies, growth remains tepid, financial risks have proliferated, and middle-class savers have lost out.
WASHINGTON, DC – For years after the 2008 financial crisis, policymakers congratulated themselves for having averted a second Great Depression. They had responded to the global recession with the kind of Keynesian fiscal and monetary stimulus that the moment required.
But nine years have passed, and official interest rates are still hovering around zero, while growth has been mediocre. Since 2008, the European Union has grown at a dismal average annual rate of just 0.9%.
The broad Keynesian consensus that emerged immediately after the crisis has become today’s prevailing economic dogma: as long as growth remains substandard and annual inflation remains below 2%, more stimulus is deemed not just appropriate, but necessary.
The arguments underlying this dogma do not hold water. For starters, measures of inflation are so poor as to be arbitrary.As Harvard’s Martin Feldstein notes, governments have no good way to measure price inflation for services and new technologies, which account for an ever greater share of advanced economies’ GDP, because quality in these sectors varies substantially over time. Moreover, real estate and other assets are not even included in the accounting. Den Rest des Beitrags lesen »
Anatole Kaletsky is Chief Economist and Co-Chairman of Gavekal Dragonomics. A former columnist at the Times of London, the International New York Times and the Financial Times, he is the author of Capitalism 4.0, The Birth of a New Economy, which anticipated many of the post-crisis transformations of the global economy. His 1985 book, Costs of Default, became an influential primer for Latin American and Asian governments negotiating debt defaults and restructurings with banks and the IMF.
Anatole Kaletsky, Project Syndicate
What many analysts still see as a temporary bubble, pumped up by artificial and unsustainable monetary stimulus, is maturing into a structural expansion of economic activity, profits, and employment that probably has many more years to run.There are at least four reasons for such optimism.LONDON – With share prices around the world setting new records almost daily, it is tempting to ask whether markets have entered a period of “irrational exuberance” and are heading for a fall. The answer is probably no.
ZURICH – The European Central Bank’s recent announcement that it will try to end asset purchases by this December means that it has confidence in its ability to achieve price stability. But those who decided that price stability should be the ECB’s single, overriding policy goal may have shot themselves in the foot, not least by denying policymakers much-needed flexibility.