Saturday, April 27, 2013

Will the ECB Cut Rates?

Brad Plumer, citing Benn Steil and Dinah Walker of the CFR, argues that the answer to the question isn't as simple as it might appear.

Consider this graph:


And this discussion from Steil and Walker:

The ECB’s official inflation-rate target is “below, but close to, 2%.” Both Portugal and Greece have inflation under 1% , but the transmission mechanism from ECB rates to business borrowing rates in those two countries has been virtually severed by the crisis. In short, they need a rate cut, but the ECB can’t deliver them one.
In those Eurozone countries where the monetary transmission mechanism is still working normally—Austria, Finland, France, Germany, and the Netherlands—the GDP-weighted-average inflation rate is 1.8%, right near the ECB’s target. … Some will argue that a bout of robust inflation in the north is just what is needed to restore competitiveness in the south. But the ECB will have to willfully ignore its price-stability mandate if it is to justify a rate cut right now, and it will almost certainly need to apply more radical tools if it is to aid the south quickly.
In short, Europe is a more diverse and disparate region than, say, the United States. It has a single market and a single currency, but its constituent economies have not converged. That makes the central bank's job difficult and impedes progress toward a more centralized economic executive.

1 comment:

Mitch Guthman said...

Sadly, I don’t think it matters anymore. Prolonged austerity in the face of a severe recession has simply tanked demand beyond the point where a cut in rates would be any good. Business don’t want to borrow because they don’t need to expand capacity; to the contrary, demand is plummeting and there is tremendous excess everywhere and people don’t have any money with which to buy stuff, anyway. It’s only going to get worse when the German economy starts to really weaken. I believe the technical term used by economists to describe this situation is “totally screwed”.

Also, the needs of the countries in the eurozone isn't an excuse for inaction by the ECB. It an explanation of why the euro project was an act of daylight madness in the first place. The most useless man in Europe needs to get off the "artificial gold standard" and fire up the printing presses, pronto. Needless to say, he won't do any such thing---which is, of course, why he's the most useless man in Europe.