After the recent Draghi press conference announcing new measures to ease monetary policy in euroland, I responded to live questions from the Financial Times: “The ECB Eases,” podcast, FT Hard Currency, June 5, 2014 (including regarding my proposal that the ECB should buy dollar bonds).
And also to questions in writing from El Mercurio, June 5:
• Many critics point that these measures do not solve the economic problems of the Eurozone and in that they only benefit the financial markets. Do you agree?
But what if the ECB is told by the international community, especially the US, that it doesn’t want them to push the euro down against the dollar, that it fears a re-ignition of the currency wars? And what if the ECB concludes that it can’t buy US treasuries without US agreement? After all, it was only February of last year that the G-7 Ministers and Governors agreed not to try to influence exchange rates.
The ECB should further ease monetary policy. Inflation at 0.8% across the eurozone is below the target of “close to 2%.” Unemployment in most countries is still high and their economies weak. Under current conditions it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% euro-wide, then the periphery countries have to suffer painful deflation.
The time is right for the world’s major central banks to reconsider the framework they use in conducting monetary policy. The US Federal Reserve and the European Central Bank are grappling with sustained economic weakness, despite years of low interest rates. In Japan, Shinzō Abe of the Liberal Democratic Party’s (LDP) was elected prime minister December 16 on a platform of switching to a new, more expansionary, monetary policy. Mark Carney, the incoming governor of the Bank of England, has made clear that he is open to new thinking.
The Hour of the Technocrats has arrived. In desperation from debt crises that their gridlocked political systems have created, Italy and Greece both in November chose new Prime Ministers who are technocratic economists rather than politicians: Mario Monti and Lucas Papademos, respectively. One can even describe them as professors: Monti has been president of the prestigious Bocconi University when not a European Commissioner in Brussels, and Papademos has been my colleague at Harvard Kennedy School in the year since he finished his term as Deputy Governor of the European Central Bank (even teaching a class I usually teach).
My preceding blogpost identified three mistakes made by leaders of the European Economic and Monetary Union in dealing with Greece. But what is done is done. The mistakes now lie in the past. How can Europe’s fiscal regime be reformed to avoid future repeats of this crisis?
The reforms that are now underway are not credible. (“We are going to make the fiscal rules more explicit and make sure to monitor them more tightly next time.”) Similarly, most proposals for how to put teeth into the rules are not credible — penalties such as monetary fines or loss of voting privileges.
By now just about everybody agrees that the European bailout of Greece has failed: The debt will have to be restructured. As has been evident for well over a year, it is not possible to think of a plausible combination of Greek budget balance, sovereign risk premium, and economic growth rates that imply anything other than an explosive path for the future ratio of debt to GDP.
There is plenty of blame to go around. But three big mistakes can be attributed to the European leadership. This includes the European Central Bank – surprisingly, in that the ECB has otherwise been the most competent and successful of Europe-wide institutions.