Solving the euro area’s problem will take years

Υπάρχει ένα όριο στο πόσο μακριά η Ισπανία, η Ιταλία και η Ελλάδα μπορούν να συνεχίσουν τις μεταρρυθμίσεις, δεδομένης της υψηλής ανεργίας των νέων (ιστορικά συνδεδεμένη με κοινωνική αναταραχή) και των δυσανάλογων επιπτώσεων που προκλήθηκαν από τον Covid-19 στην ανάπτυξη από τον τουρισμό

Quantitative easing helped but it’s not the solution

Before Covid-19 and the Russian invasion of Ukraine, the worst of the euro area’s macro strains looked to be behind it, as the lagged effects of ultra-low bond yields (we’ve had seven years of quantitative easing) flowed through to confidence and higher loan demand. But, while helpful in addressing the main symptom, deflation, the combined monetary loosening of Mario Draghi, former European Central Bank president, and Christine Lagarde, the current ECB president, should never have been expected to solve the underlying problem – a monetary union devoid of economic union. Resolving this will take years.

There are hawkish forces at the ECB and the 10 March decision to step up the pace of monetary ‘normalisation’ was an uneasy compromise for some. The get-out, for now, is that the end of QE was always meant to be flexible, dependent on both data and events. But, with one ‘monetary glove’ still not fitting all 19 members’ hands and their central banks’ support of growing bond supply likely to fall, quantitative tightening – when it comes – could end up being less intense and shorter-lived than many expected.

OMFIF’s competitiveness analysis shows the progress so far (see chart). It uses the OECD’s estimates of a country’s unit labour costs in all goods and services, relative to those of its main trading partners (the average is weighted and indexed to a 2015 base year). A rising index indicates a de facto real effective exchange rate appreciation and falling competitiveness.

First, as an amorphous bloc, the euro area has, after a decade of austerity, been regaining the competitiveness it lost with the single currency. Only part of this can be laid at the weaker euro’s door. The area’s costs between 2000-09 rose 19% relative to its trading partners, compared with falls of 22% and 34% in the US and UK. Yet, since austerity started in 2010, its costs have fallen back 3%, beefing up a current account surplus that was helped by the low price of oil. This beats a currency-induced rise of 22% in the US and 9% in the UK. The challenge, given the oil price surge and potential supply disruption from Russia, will be sustaining this relative advantage for euro area exports.

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