Trade Resources Economy The Recovery of Euro Zone Economy

The Recovery of Euro Zone Economy

In order to breath life into the flagging euro zone economy and fending off deflation, The European Central Bank is poised to announce a plan to buy government bonds, resorting to its last big policy tool. Market expectations are sky-high for the ECB to unveil a large-scale program of quantitative easing (QE) - printing money to purchase the sovereign bonds - despite opposition from Germany's Bundesbank and concerns in Berlin that this could allow spendthrift countries to slacken their economic reforms.

Mounting concerns about the euro zone economy were underlined by the US Federal Reserve's influential vice chair, Stanley Fischer, who broke with etiquette to say that money-printing would help Europe as it had the United States. "If the ECB moves in that direction, it will have positive effects," Fischer, who was Draghi's academic mentor at university, told a newspaper in Italy.

While the ECB's board is seeking ways to overcome this operational problem, opponents of QE throw another spanner in the works. Thus, caught between its operational problem and macroprudential concerns, the ECB seems confined to the role of a spectator of unimpeded deflationary forces. Here is something that the ECB could do that overcomes its twin problems (the operational constraint and macroprudential concerns regarding QE) while spearing investment-led recovery without new government debts and without violating any treaties (including the ECB's own charter).

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