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ECB’s Draghi Entirely Right – Now Is No Time To Stop Eurozone QE

Forbes  |  Tim Worstall

The history of European economic management since the Great Crash has been one of eternally not doing enough and doing it too late.

Thus it is heartwarming to see that Mario Draghi of the European Central Bank is insistent that we must not make that mistake again. Yes, it’s entirely true that much of the eurozone economy seems to be getting back to its feet. Of course, Finland and Greece are still mired in it but most others are doing reasonably well. This isn’t the time though to be stopping nor, heavens above, reversing quantitative easing:

“European Central Bank President Mario Draghi warned on Monday that it isn’t yet time to withdraw the ECB’s stimulus measures, even as he pointed to signs of strength in the eurozone’s €10 trillion economy.”

Quite so, quite so, we want to get inflation up a bit more from where it is at present. The target is similar to but not the same as that of the BoE or Federal Reserve. Those latter two have “about” 2% as their targets and the ECB has “up to” 2%. Even so, while the standard inflation rate is getting there the more important one, core inflation, isn’t. The last month or two have seen oil and food prices up and they are much too volatile to be basing monetary policy decisions upon:

“Even as inflation in the 19-nation euro area jumped around the turn of the year, reaching a close-to-target 1.8 percent in January, the ECB’s view is that current gains are largely driven by energy prices and don’t warrant a discussion about tightening monetary policy yet. The ECB will trim its bond-buying program to 60 billion euros ($64 billion) per month in April from 80 billion euros a month currently, and it intends at this stage to let it run at that pace until the end of the year.”

That all sounds very sensible indeed.

“With inflation surging to the ECB’s target last month, calls, particularly from Berlin, have increased for the bank to claw back stimulus and start phasing out its 2.3 trillion euro asset buying programme, which has kept borrowing costs at record lows for years.”

“Echoing the message of Peter Praet, his chief economist, Draghi said the ECB would not react to short term and temporary swings in data, suggesting that any tapering, or winding down the asset buys is far into the future.”

As I say, the history of the ECB’s actions (the fiscal policy by governments has been even worse) recently has been little and late. It didn’t even cut interest rates to an effective zero until several years into the crisis and even raised them at one small sign of a slight upturn–one that disappeared as soon as that interest rate went up. Similarly, they were several years late to the idea that QE does actually work. They’re therefore a few years behind everyone else and they have by no means at all fixed the problems with what they’ve done so far.

It may well be true that the Fed is gradually raising rates, that the BoE is talking about it again, but neither have reversed QE as yet and they are, as we can point to, at least three years ahead of the ECB in the cycle. Draghi’s right here, just more of the same.

 

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