Monetary policy in the euro zone has been extremely expansive for a long time. But true to the motto “The more you have, the less you see,” quite a few representatives of the European Central Bank’s governing council are pushing for more monetary relief.
In order to prepare the ground for it, they paint a bleak economic picture and refer to persistent deflationary threats.
This pessimism is exaggerated. The euro-zone economy has been growing for the last two-and-a-half years, albeit rather weakly. The current low inflation rates are due largely to the sharp fall in oil prices.
There's a risk that the extremely loose monetary policy acts as an opiate.
When one takes the oil prices out of the equation, then the adjusted inflation rate since the start of the year has risen from 0.5 percent to almost 1 percent. There is no evidence to suggest that consumers or investors are postponing purchases because they expect prices to fall. This would be the decisive criterion that separates low inflation rates from serious deflationary risks.
The hope that a further monetary easing could accelerate sluggish lending and therefore accelerate economic activity in the euro zone is deceptive. Banks are not trying to slow down credit growth in the euro zone.
A constraining factor of lending in Germany is the low demand for credit; in other euro-zone countries there is a reluctance to lend to businesses or private households.
Given the already extremely low interest rates, further monetary stimulus would not change the demand for loans or credit. On the contrary, in the short term there is even the danger that the persistent warnings from the ECB over the risk of deflation could unsettle investors and convince them to adopt a wait-and-see approach.
This throws the spotlight on the general risks and side effects of extremely loose monetary policy. A zero-interest-rate policy drives many investors to look for returns in higher-risk investments. Thus the price drops for these risks, without removing the risks themselves. Misguided investments and price bubbles threaten in certain markets.
In addition, there’s a risk that the extremely loose monetary policy acts as an opiate: Who wants to take on structural reforms or rehabilitate ailing banks’ balance sheets, if you can happily muddle through and still reap a sustained windfall? The risks increase the longer this expansive monetary policy is maintained.
We should focus on the real problems. The sluggish economic growth in the euro zone is primarily of a structural nature: In many euro area countries, the labor and product markets are still over-regulated; the public sector is oversized, productivity development is low, and social security systems are under-prepared for demographic change.
In all of these weak points, monetary policy is powerless. Certainly, they can buy time, but that’s what they’ve been doing since the financial crisis began. This crisis mode must not be allowed to become a normal state of monetary policy.
The ongoing tale of misery in Japan should be a warning not to keep on postponing structural reforms indefinitely.
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