Is the Eurozone Beginning to Wake Up to Reality?

Mark Sadowski sent me some interesting links from the WSJ:

Speaking to journalists late Wednesday in Frankfurt, Deutsche Bank chief economist David Folkerts-Landau said that at some point the ECB will likely have to revert to “genuine QE,” amid very weak inflation and stagnant economic activity.

Pressure on the ECB will intensify if gross domestic product growth fails to accelerate above 1% and toward 2%, he said, and if annual inflation remains stuck in the 0.5% to 1% range. Annual consumer price growth was 0.7% in the euro zone in October, and 0.9% in November.

Euro-zone GDP grew 0.4%, at an annualized rate, during the third quarter. The ECB expects GDP to increase 1.1% in 2014 and 1.5% in 2015.

Mr. Folkerts-Landau said he expects growth in the euro zone to be low “pretty much as far as the eye can see,” given the need of debt-holders to deleverage and with the bank-lending channel still broken.

If the Germans are recognizing that eurozone NGDP growth is too slow, that’s a very positive sign.  On the other hand it’s frustrating to see people continue to get causality backwards.  I wish that last paragraph had read:

Mr. Folkerts-Landau said he expects to see debt-holders continue to deleverage and the bank-lending channel continue to be broken, as slow growth caused by tight money continues to put pressure on borrowers.

Here’s another hopeful link:

The International Monetary Fund wants the European Central Bank to get tough on (low) inflation, and the first thing it could do is to start making European banks pay to store their excess cash with the central bank.

“Nowadays inflation is below 1%. This is not satisfactory,” José Viñals, financial counselor and director for the international organization, said in an interview Wednesday with The Wall Street Journal during a visit to Frankfurt to promote a new book on financial integration in Europe.

“The ECB will have to continue doing as much as it can in order to support price stability,” he added, echoing comments from his boss IMF Managing Director Christine Lagarde on Tuesday.

Amid weak economic growth, high unemployment and inflation in the euro zone well below the ECB’s mandate of just under 2%, the ECB has assured the monetary bloc that it has all the tools necessary to further stimulate the economy if needed.

These include setting a negative rate on deposits from commercial banks, large scale asset purchases known as quantitative easing and another long-term bank loan tied to lending in the real economy. But so far the ECB has been reluctant to act on any of these measures.

That last sentence pretty much sums up the past 5 years for the entire developed world.

PS. I may have been the first to publish the negative IOR idea, but am not certain.

Update:  I like this comment from Ryan Avent:

The most straightforward story for a place like America is that various factors, from inequality to foreign reserve accumulation to demand for safe assets, have depressed nominal interest rates in America. And too many officials have interpreted low interest rates as reflecting sufficiently stimulative—”ultra-loose” is the common phrasing”—monetary policy. But you can’t judge a monetary policy by nominal interest rates; you can’t, you can’t, you can’t. So while it’s interesting to talk about the potential causes of secular stagnation, such talk shouldn’t be driving policy in places not called Germany.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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