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.
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).