Opinion – Mere criticism of the ECB is no solution | Bruegel

Euro ECB

Euro ECB (Photo credit: Wikipedia)

Wolfgang Schäuble, German finance minister (CD...

Wolfgang Schäuble, German finance minister (CDU) on March 9th 2011, during a pre-election party in Bensheim (Hesse). (Photo credit: Wikipedia)

This is an outstanding must-read article by think-tank Bruegel. The seven authors are leading economists, many based in Germany. The article explores two fundamental questions. Firstly, what would happen if the ECB failed to respond to the excessively low inflation and the weak economy? Secondly, what economic policy would be suitable under the current circumstances, if not monetary policy?

Source: Mere criticism of the ECB is no solution | Bruegel

Well written and carefully argued, the authors make a powerful case. But fundamentally, there is nothing new here.

The crux of the crisis emanates from the conservative economic policy of the German government. Germany has lectured Southern Europe endlessly about living within their means. The Fiscal Compact to support the Euro has not caused the expected convergence. Germany has consistently refused to reflate her economy and encourage infrastructure investment. Meanwhile, France has flouted the rules of the Fiscal Compact year after year. Radical policy from the ECB has stopped the Eurozone from spiralling downwards into a deep depression. But German has consistently been putting road-blocks in front of ECB policy.

It’s not new but what is required is a belt and braces approach, loosening both monetary and fiscal policy across the Eurozone. Monetary policy is the preserve of the ECB and it has already been bold, so perhaps now it needs to be radical? As for fiscal policy, this has been trapped by the Fiscal Constraint, ruthlessly applied to smaller countries Southern European countries by both the ECB and Germany.

The other important factor is to consider the wider political context and its likely direction over time. Everywhere right wing populists, like Le Pen, are on the rise. If the UK votes for Brexit, the coming elections in France and Germany could be pivotal to radical change. Rather than increased centralization of power, we could quickly witness the risk of accelerated dismantling of EU institutions.



Lending to SMEs and entrepreneurs is improving, but more diverse forms of financing are needed – OECD

English: The logo of the Organisation for Econ...

English: The logo of the Organisation for Economic Co-operation and Development (OECD). (Photo credit: Wikipedia)

This is an important new report published by OECD. It highlights that financing for small and medium-sized enterprises (SMEs) has turned the corner from the downswing seen during the global financial crisis, but overall credit conditions remain challenging and access to external finance continues to be much tighter for SMEs than larger firms.

Source: Lending to SMEs and entrepreneurs is improving, but more diverse forms of financing are needed – OECD

I was disappointed that the report was not more critical of the major banks who despite all sorts of inducements have failed to leverage loans to SMEs. This is important because typically SMEs generate new jobs more quickly than larger firms.

What the report highlighted for me was the importance of government guarantees. Significantly, France with a socialist government and generally not friendly to entrepreneurs, we find surprisingly high government guarantees. By comparison, in the UK and Southern Europe government guarantees for SMEs are negligible. Part of the problem seems to be the monetary policy and fiscal policy are not coordinated effectively.

In my mind SMEs generally get a raw deal compared to big business. Big business has more effective political lobbying. Governments seem to rely on intermediaries in dealing with SMEs. Most importantly, there seems to be an absence of an effective industry strategy.