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Can the ECB revive growth and inflation in the euro zone, or will it merely create a moral hazard for governments and fiscal policies?
The ECB has taken a number of very important decisions:
• Commitment to prevent the outbreak of a fresh sovereign debt crisis in the euro zone;
• Commitment to keep short-term interest rates at zero for a long time;
• Switch to quantitative easing with purchases of ABS, covered bonds and other assets if necessary.
Can we expect these decisions to kick-start growth and bring back inflation
in the euro zone?
We believe this is highly unlikely:
• Deleveraging continues despite the very low interest rates;
• There are no wealth effects in the euro zone;
• The banks’ situation is healthy and buying assets from them will not lead to an upturn in credit;
• The euro’s depreciation has a limited effect on euro-zone growth.
Unfortunately, the only significant effect of the ECB’s policy may be to create a significant moral hazard, by encouraging some countries to not reduce their fiscal deficits since they can be financed at such low interest rates. The ECB is actually unable to make its policies conditional on fiscaldeficit reduction, as this would be a breach of its independence.
