After the recent Draghi press conference announcing new measures to ease monetary policy in euroland, I responded to live questions from the Financial Times: “The ECB Eases,” podcast, FT Hard Currency, June 5, 2014 (including regarding my proposal that the ECB should buy dollar bonds).
And also to questions in writing from El Mercurio, June 5:
• Many critics point that these measures do not solve the economic problems of the Eurozone and in that they only benefit the financial markets. Do you agree?
JF: It is too much to expect monetary policy by itself to solve all the economic problems of the Eurozone. But I think the measures announced by the ECB today were steps in the right direction. Mario Draghi emphasized steps to facilitate the transmission of easier money to the real economy, as part of the Targeted LTROs, and also as part of possible plans for Quantitative Easing in the future.
• The ECB also announced that long term loans will be monitored to assure the liquidity is allocated as new loans to businesses. Is that feasible?
JF: There is no guarantee. It is hard to stimulate increased lending to firms and business fixed investment if firms are not experiencing demand for what they are producing already. The ECB can only try and the Target LTROs look like a good attempt.
• If at the same time the ECB cuts GDP projection for this year and forecasts inflation at 1.4% in 2016, under 2%, is not that a kind of recognition of the limitations of monetary policy?
JF: It is a recognition that the euroland economy has been weaker lately, and inflation lower, than they had hoped.
• Will these measures be enough to boost the recovery? Even when there are still structural problems in the Eurozone?
JF: There are limits to what monetary policy can do, especially when interests are at the Zero Lower Bound, as they are. Far more needs to be done in structural reforms, for example.
• Is it possible that, without the pressure of the markets, the governments of the periphery countries will delay even more the needed reforms?
JF: Any time you use one policy to try to make things better, there is the possibility that it will “take the pressure off” of other policies. But that is not a reason not to do it. And in this case, popular discontent with the long period of economic hardship is so high in Europe — as shown for example by the gains of anti-EU parties in the recent elections — that some positive economic pay-off could arguably help rather than hurt the chances for structural reform.
• The measures of the ECB also imply an intervention in the exchange market. Should we expect measures of other banks in response? Will the pressure over the euro last?
JF: These measures are far short of intervention in the foreign exchange market in the sense of buying dollars for euros. And even if the ECB moves to Quantitative Easing in the future, it is unlikely to adopt my proposal to do it by buying dollar bonds instead of euro bonds. You are wondering about the fact that today’s measures appear so far to have caused a depreciation of the euro (along with some boost to stock markets in Europe, and in some emerging markets as well). I see no reason for other countries necessarily to worry or to respond. Given the chances of higher interest rates soon in the US, I don’t think the current phase is back in the situation of several years ago, when easy monetary policy sent waves of capital into emerging markets and put upward pressure on their currencies. But in any case, the beauty of floating exchange rates is that they can automatically accommodate international differences in monetary policy that arise in respond to differences in each country’s economic needs.