Mario Draghi has finally declared war on deflation. After unsuccessfully exhausted verbal communication strategy to convince the markets recover, the president of the European Central Bank has been forced to take out the (not heavy) light artillery to revive the economy of the area euro. Are multiple monetary fronts opened Draghi: interest rates have reached 0.05% (the limit of the possible), banks must now pay 0.2% if they park their money at the ECB (something not the Fed or the Bank of England have dared to do), the open bar specific liquidity (TLTRO, for its acronym in English) is about to be detonated, and most importantly, the ECB will start a program to purchase ABS qualifications for a total value of up to a trillion (with b) Euros that should ease the battered bank balance sheets and thus reopen the floodgates of credit
If the results of the analyzes of bank assets are credible credit could be activated
Many wonder if it will work. Three structural impediments require some skepticism. First, much will depend on how the markets receive the analysis of bank assets and the stress tests that the ECB will present in November. If the results are credible because at the end of the process the European authorities liquidate zombie companies and recapitalize weak banks, they may trust and credit flowing again. Otherwise, the credit bottleneck persist. The experience of the USA and the UK shows that until the banking sector is not recapitalize there will be recovery. It is unfortunate that the European authorities have taken five years to resolve this issue.
The second obstacle has to do with the questions that are on the effectiveness of quantitative easing (QE, Quantitative easing in English). In the academic debate there is no clear consensus on the effects of QE. After increasing between 2008 and 2014 the balance of the 800,000 million to 4 billion (about 25% of GDP), the Fed has only achieved a rate of inflation of 2%. The deflation has been avoided, but low inflation persists, and the risks that we have entered a period of secular stagnation. Perhaps where there is greater consensus in the wealth effect generated by QE. Monetary expansion has been noticeable particularly in rising stock prices. The Dow Jones S & P 500 and the FTSE 100 are at record high. Unfortunately, this effect is greatly increased inequality, the great challenge to prevent erosion of democracy. Also, yes, its effectiveness is much higher in the USA and the UK, where many of its citizens have their savings in the stock market, in Europe, where people have their money in the bank.
The third structural impediment is because this crisis was caused by excessive borrowing by the private sector. Therefore it is a crisis of balances. Until equilibrate with reduced debt levels, it is difficult to return the business investment and household consumption. Again the experience of the USA is illuminating. The recovery in the United States is not so much a wealth effect and QE but rather to American bankruptcy law facilitates debt restructuring for both companies and individuals. Companies can grab the Chapter 7 and 11 to renegotiate the debt with your creditors, and individuals can use in lieu of payment to get rid of the mortgage or Chapter 13 to renegotiate with their bank accumulated in their credit card debts. All this helps to reduce debt levels, rebalance and stimulate new balances investment and consumption. Europe should review its legislation in bankruptcy if you want to avoid not one but two lost decades
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Fiscal expasión not solve alone structural deficiencies facing Europe
But until that happens will be a long time and we must act now. Given that the expansionary monetary policy is necessary but insufficient, it will not be forced to use the weapon of fiscal policy. Draghi has already acknowledged in his speech at Jackson Hole. However, there are two problems with fiscal expansion. Simply spending more money will not solve the structural weaknesses in Europe, such as the lack of a fiscal, economic, credit union, money, energy and digital, and the lack of productivity in the periphery, to name only the most obvious. It will grow for a few years, but will return to the starting point (and more debt). It is vital therefore direct the fiscal stimulus effectively. The second problem, and this really is of significance, is that Germany (mostly conservative) is reluctant to use Keynesian policy. From their point of view, this infusion of spending would free France and Italy to undertake the necessary structural reforms. The experience of Spain, Portugal and Ireland says that these reforms will only make the noose.
Given all these obstacles, the solution is given by Draghi to act not only on the front monetary but also fiscal and structural reforms (which has already been dubbed Draghinomics for its similarity to the Abenomics Japanese). At this moment what Europe needs is a political pact. That is the great challenge of Juncker as the new president of the Commission. Draghi must stimulate monetarily. The eurozone bloc, and especially Germany, must wisely to stimulate fiscally. And France and Italy have to commit (under threat of sanctions, but Germany does not sign) to make the necessary structural reforms to become more productive and competitive. Hopefully for the sake of Europe that this agreement a reality. Otherwise, Draghi will have to activate the heavy artillery (ie purchase sovereign bonds in huge quantities). That can dangerously tighten cooperation between Berlin and Frankfurt.
Miguel Otero-Iglesias is principal investigator for the European economy and the emerging markets of the Elcano Royal Institute.
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