“Dragui promises, whatever it takes for as long as necessary” – The Trade

"Dragui promises, whatever it takes for as long as necessary" – The Trade

Martin Wolf / Principal Economic Commentator of the Financial Times

Poor Mario Draghi, President of the European Central Bank (ECB). You are trying to guide the eurozone monetary “water”. Unfortunately, the beast has many heads: some want to drink a glass; others insist that drinking would be detrimental to everyone. However, the ECB has to try. Letting deflation takes hold would be much more dangerous.

So European Central Bank has decided to buy € 60 billion of assets each month until at least September 2016. Above all, purchases will remain until the bank sees “sustained adjustment” in the path of inflation that is consistent with its objective of inflation “below, but close to 2%” over the medium term.

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The allocation of purchases will be in line with the interests of each country capital of European Central Bank (about the same as the shares gross domestic product). In a concession to Germany, the ECB has agreed that 80% of purchases fall in the balance sheets of the national central banks. However, he stresses, “the Governing Council maintains control over all features of program design and the ECB will coordinate purchases, safeguarding the unique aspect … of monetary policy”.

This is similar to Draghi commitment made in 2012 to do “whatever it takes” to save the euro. This time, the European Central Bank says it will buy around one billion euros in assets, equivalent to 10% of eurozone GDP and a similar proportion of gross public debt. Above all, it will continue until you reach your goal.

It is a much bolder than expected move, although no one should be surprised that the ECB really determined to do their job. In addition, this open commitment might well throw the eurozone into a recovery process. The block now benefits from lower oil prices, some structural reforms, a stronger banking sector and a reduction in the interests of sovereign debt. The commitment of European Central Bank could trigger an upward spiral in confidence.

Critics are divided into two opposing camps. The first accepts the fact that the eurozone suffers chronically weak demand, requiring the deployment of standard macroeconomic tools. But, these people argue, monetary action is insufficient and, worse, takes pressure off governments to implement expansionary fiscal policies.

However, it is definitely too dangerous to speculate the central bank what will the governments. Moreover, what has been announced is certainly the limit of what can be achieved Draghi. The crucial point is that the European Central Bank has established a benchmark against which the cessation program must now be justified. The second field consists of those who think that QE is practically an invention of the devil. Let go of the opinion that it is the first step to hyperinflation; the evidence against it is overwhelming. The most serious arguments are that mild deflation is not harmful, monetary policy can not solve structural problems and eliminate quantitative easing pressure on governments to carry out these necessary reforms.

CREDIBILITY AT RISK

The first of these points is too complacent. Deflation aggravate the problems of heavily indebted. Moreover, unlike Japan, the eurozone lacks the ability to use fiscal policy, if needed to contain the impact of deflation. Finally, the failure to achieve the objective of the ECB would be devastating to their credibility

The answer to the second is:. So what? It is true that monetary easing will not heal structural problems. But the euro did not fall into depression because of supply problems worsened suddenly. It fell because demand collapsed. In addition, the reform of the supply side will not necessarily increase demand, as shown by the performance of Germany in the last decade. In fact, labor market reforms could reduce demand in the short term, as workers fear layoffs and wage cuts.

The answer to the last of these is the belief that Only governments are reformed under the threat of whip is too sadistic. There is also a strong point of opposition governments to undertake painful reforms, but not receiving aid policies demand, will be discredited and rejected. The eurozone could soon be making against populist governments of the left or totally opposed to the policies imposed on them right eurozone. That would certainly be a much greater disaster.

No one knows whether this action takes effect, but at least it’s a start. The intensity of the opposition in Germany could also undermine its credibility. But the European Central Bank is at least acting. It is far from a complete solution to the problems of the eurozone. But it is a positive effort to keep the euro on track.