ECB’s Mario Draghi Signals Boost to Stimulus Program – WSJ

According to the WSJ, European Central Bank President, Mario Draghi, suggested the bank is prepared to undertake another big stimulus package that could include more bond purchases and a cut to the already negative deposit rate, as the Eurozone struggles with ultra low inflation and a tepid recovery.

Source: ECB’s Mario Draghi Signals Boost to Stimulus Program – WSJ

The WSJ article is a recommended read.

What is significant is the strength of Draghi’s response. On the back of the promise of big action before Xmas, global financial markets have responded firmly with significant gains. But paradoxically, the stimulus is a symptom of the weakness in the global economy, where for example rate increases from the Fed and the BoE have been deferred.

The strength of Draghi’s response means that opposing forces in Germany have been silenced, for the moment.

Of course, radical monetary policy is just one of the two important areas of economic policy. The second important area is fiscal demand. Unfortunately, the Eurozone is still practicing fiscal constraint, pushed by powerful interests in Germany. Politically, Keynsian demand management has been out of fashion in Berlin, London and Washington. However, Canada’s new leader, Justin Trudeau has promised a dose of Keynesian stimulation.

With elections in many European countries in the next few years, I would expect a continued pushback against austerity (along with immigration).

The Eurozone, especially Southern Europe, will not recover fully without fiscal stimulation. This needs to be in the form of government borrowing and investment in properly risk-assessed infrastructure projects (just like Canada is proposing).

Thoughts?

One response

  1. What Draghi is proposing is as with everything else within the EU too little, too late.

    Southern Europe needs to recover and as Dr Alf says it will need this stimulus to do so.

    On its own the stimulus is a temporary measure which will have to be accompanied by welfare reform, pensions reform, a stronger attempt to root out corruption and radical transformation of business, local authority finance and productivity.

    Draghi has not talked about these other measures and neither has Renzi, the Portuguese Prime Minister and, of course, the Greeks.

    Conservatives have had enough of taxation, EU subidy and immigration. Meanwhile, liberals want social policies to promote jobs and give them and their families greater quality of life. As usual, politicians are not being fully open. But there is a reckoning with ewlections in Germany, France and the Brexit referendum.

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