The ECB decision is wise and balanced. It may disappoint many in Germany. The extension of the PSPP programme was inevitable as the risks to the euro area economy are still huge and the ECB is likely to miss its price stability mandate through 2019.
The ECB decision is wise as it leaves all options open. The ECB is introducing more flexibility through the changes to the PSPP programme. The ECB decision implies a longer period of low interest rates
The European Central Bank is facing a difficult dilemma. The slower the euro area economy is growing, the lower interest rates and the harder it becomes for the ECB to implement its public sector purchase program. The ECB has assumed a wait-and-see strategy in the hope that its new measures will be effective and the economy will not deteriorate further. Italy’s banking crisis, more than the Brexit, is an enormous risk for the entire euro area, also for Germany, and
This article was first published on VOXEU.org on June 25, 2016.
Britain voted to leave the EU. This is terrible news for the UK, but it is also bad news for the Eurozone. Brexit opens the door to all sorts of shocks, and dangerous political snowball effects. Now is the time to shore up the Eurozone’s resiliency. The situation is not yet dire, but prompt action is needed. This VoxEU column – which is signed by a wide range of
An important aspect, that has been widely ignored in the debate about the consequences of a Brexit, is the impact on ECB monetary policy. Lower oil prices and a weaker economy in the euro zone and in Germany are likely to increase deflationary pressures further. As a consequence, the ECB is likely to extend its expansionary monetary policy path further into the future. The Brexit will most likely imply a longer period of zero interest rates for the euro area.
The ECB has signaled that low inflation is likely to persist even longer than previously feared. The new projections by the ECB have increased the probability of an extension of QE beyond March 2017. The ECB is putting great hopes into its new liquidity program for banks in order to improve credit to the private sector, strengthen the economy and thereby raise the inflation rate.
“With its decision, the ECB has signalled the continuation of its expansionary monetary policy. The ECB policy of low interest rates will not end soon. I expect interest rates to remain close to zero for another 3 to 4 years.
In the latest Spotlight, DIW President Marcel Fratzscher explains why helicopter money offers the possibility to “circumvent” the banking system and make loans and funding directly available to households and private companies, which would help the ECB to fulfill their price stability mandate again.
Mr. Fratzscher, there are concerns about an overall lack of investment in Germany. Is the problem more urgent in the public sector or in the private sector? The investment gap exists in both the public and private sector. Three years ago, we calculated that Germany’s investment gap amounts to roughly 75 billion euros per year. The investment gap has also been confirmed by other studies. The problem is definitely more urgent in the private sector.
The European Central Bank has expanded its monetary policy stance considerably. Despite the expansion of its policy, the ECB has disappointed financial markets as it had promised an even stronger expansion.
The new ECB projections for growth and the return to price stability are very optimistic. The ECB projections are based on probably too optimistic expectations about the effectiveness of its QE programme. The weak euro and the decline in government bond yields over the past few months are largely the result of the high expectations about the QE programme. It is unlikely that the QE programme will continue to exert