Back
10 Dec 2014
ECB should realise that monetary and fiscal policy go hand in hand – BBH
FXStreet (Barcelona) - The BBH Research Team question the effectiveness of ECB’s bond buying program and note ECB should realise that relying on only one among monetary or fiscal policy cannot ensure a faster growth in the eurozone economy.
Key Quotes
“If the eurozone economy is a ship with two engines (monetary and fiscal policy), and one is off-line (fiscal policy) making the other one (monetary policy) work harder does not get one to the destination quicker. Rather if the starboard engine is not working, stoking the port engine makes one go in a circle. Perhaps a couple of years ago, a sovereign bond buying program may have worked and been effective.”
“The main problem of the euro-area is not monetary policy. It is not that interest rates are too high or that there is insufficient liquidity. The financial fragmentation has lessened. Yes, peripheral borrowers pay more than core borrowers. In other times, this would be recognized as appropriately pricing risk; desirable behavior.”
“The ECB has repeatedly tried to fill the vacuum created by austerity and the lack of structural reforms. It cannot create aggregate demand. It cannot boost potential growth. ECB officials recognize that monetary policy is just one part of the policy response. Monetary policy has worked, but it is no closer to overcoming its governance or coordination challenges with fiscal policy and structural reforms. Moreover, nearly every eurozone country faces a rising anti-EU political force, which also limits room to maneuver.”
Key Quotes
“If the eurozone economy is a ship with two engines (monetary and fiscal policy), and one is off-line (fiscal policy) making the other one (monetary policy) work harder does not get one to the destination quicker. Rather if the starboard engine is not working, stoking the port engine makes one go in a circle. Perhaps a couple of years ago, a sovereign bond buying program may have worked and been effective.”
“The main problem of the euro-area is not monetary policy. It is not that interest rates are too high or that there is insufficient liquidity. The financial fragmentation has lessened. Yes, peripheral borrowers pay more than core borrowers. In other times, this would be recognized as appropriately pricing risk; desirable behavior.”
“The ECB has repeatedly tried to fill the vacuum created by austerity and the lack of structural reforms. It cannot create aggregate demand. It cannot boost potential growth. ECB officials recognize that monetary policy is just one part of the policy response. Monetary policy has worked, but it is no closer to overcoming its governance or coordination challenges with fiscal policy and structural reforms. Moreover, nearly every eurozone country faces a rising anti-EU political force, which also limits room to maneuver.”