Should the ECB keep all options on the table to counter any renewed downturn?
Just a few months ago, all looked calm for the Eurozone. Five years into a recovery, though with core inflation still below the European Central Bank’s objective, there was ample potential for broadening the expansion before reaching any significant capacity restraints.
The ECB, which was later than its US counterpart to introduce quantitative easing, warned that it would curtail bond purchases later this year, but only as long as the economy was performing successfully.
Since then, although the Eurozone recovery has not ended, even though it is floundering. The central bank would do well not just to reconsider stopping bond purchases under QE next month, but also to preserve and emphasise the array of weapons for monetary stimulus still at its disposal.
Last week Germany, one of the few reliable generators of Eurozone revealed that growth since the global financial crisis had seen a 0.2 percent fall in GDP in the third quarter after healthy expansion of 0.5 percent in the second.
Indicators of business sentiment show that underlying growth momentum has slowed across the Eurozone. In this context, core consumer price inflation still well below target looks more like an economy striving to generate a solid long-run growth rate than one with plenty of room to expand.
That is even without the potential risks to exports of a hard Brexit or a rapid acceleration in US protectionism. Despite the frothy rhetoric and the drastic across-the-board tariffs that Donald Trump has placed on China, the US administration has so far targeted only steel and aluminium exports from the EU.
If the Eurozone weakens, it will become even more lamentable that reform inside the single currency zone has been so lackluster.
In this context, whatever the ECB does with QE, it is critical it possesses the capabilities developed following the global financial crisis and especially the Eurozone sovereign debt turmoil.
Far from decommissioning its weapons, the ECB should clarify that they are kept in constant repair. It is for the moment unclear whether the blip in growth will become a downturn. The ECB needs to signal that it keeps the capacity to react swiftly and decisively if it does.