By openly recognising the blatant inability of monetary easing in addressing on its own the current stagnation, it has opened the Pandora’s Box. For, it will take longer than expected to reach political consensus on common action to invigorate demand and activity. Full commitment to implement widespread reforms might prove even trickier to achieve. Meanwhile, pressure on the ECB will mount for triggering the massive asset-buying programme portrayed in its recent package as a last resort weapon.
In today’s press conference, Draghi will have to deliver appeasing messages on a prompt QE implementation. Now the issue is no longer “whether” but “when” it deals clumsily. Only a narrow window lies ahead before rising rates across the Atlantic hinders Eurozone hopes for recovery. As the markets already discount the move, the ECB is bound to act.
For all the merits the quantitative easing may have, in terms of enhanced financial markets integration and lower volatility, many observers express their scepticism on its overall benefits while others object to its hasty triggering. Hardliners staunchly reject a device amounting to a disguised way of monetizing deficits.
Yet, no instrument proves so useful in providing a credible stance to ECB growth commitment. In doing so, it helps lifting expectations for higher inflation in future thus curving the current bearish mood. Credit conditions would also step back to normal as the rate slope stiffens and differentials narrow. QE would provide growth a fair chance to materialise, so long co-ordinated action in fiscal policy follows suit.
Reform plans stand as the key tool for increasing potential growth. Yet they can hardly cope with short-term gaps and mismatches. Thus, linking QE triggering to widespread structural adjustments, as Draghi suggests, amounts to a flawed strategy. Right now, bolstering confidence and lifting up expectations stand as the most pressing need for the Eurozone. Only a combined fiscal and monetary stimulus can effectively deliver it. The sooner this plan is enforced, the better.