IS THE EUROZONE OUT OF BULLETS?

The term “out of bullets” is often used when an economy has stalled badly and the central bank has already reduced interest rates to the point where they cannot go any lower.  In the aftermath of The Great Recession, the U.S. Federal Reserve Board, which had already taken rates down to virtually nothing, devised a new tool–”quantitative. easing”.  While very low interest rates enables the bank to pump money into the economy, QE does something similar, adding liquidity to the economy by buying bonds from the major banks.  It has since began to reverse that process.

The ECB’s key interest rate has remained at 0.05% (virtually none at all) since September of last year, and earlier this year it had begun a QE program which is expected to continue until September of next year.  Recently. ECB President Mario Draghi had warned other central banks, at an IMF meeting, that they must closely monitor the effects of bond-buying programs so as not to create asset bubbles.  At the same time, he has been warning ECB finance ministers that monetary policy might be sliding into ineffectiveness.  Without any inflation whatsoever, the banks’ powers tend to lose their effectiveness.

I believe that Mario Draghi is truly grasping at straws. The Eurozone should have used the double-barreled–Monetary and Fiscal Policy–approach to stimulating the Zone’s economy, and much sooner.  Further, its important to remember that the economies that use the common currency, the Euro, are deeply intertwined with the other nine European Union members that have retained their own currencies.  So, what’s the problem?

The Eurozone is like a huge Tower of Babel.  Rather than speak different languages, however, the nineteen finance ministers each represents a different constituency.  So, while Draghi overseas the overall monetary policy, each of the ministers still manage their respective fiscal policies.  Talk about a two-headed monster!

Besides the inability to coordinate the two policies, the delays in the Zone to take the necessary actions was only made worse by its indecisiveness.  And, on top of all that bureaucracy, German Chancellor Angela Merkel and her Finance Minister Wolfgang Schnauble are vehemently opposed to providing the necessary stimulus.  Unfortunately, proper corrective action should have been taken years ago.  Perhaps Germany should be reminded that policies that may be best for one country might not necessarily be suitable for all.

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