The biggest economic threat today is not the interest rate, nor the exchange rates, nor the possible trade war fuelled by Trump: it’s the debt accumulated by countries across the world. This has increased 12% of GDP since the crisis, totalling 225% of global GDP. Starting with China, followed by Europe and ending up with the US, the threat from the current and future debt is terrifying.
ECB monetary policy
The central banks are still powerful. They can make the financial markets rise or plunge them into the doldrums. But the CBs need to scrutinise the financial system and its systemic risks more closely.
The non-banking sector in Europe currently accounts for 54% of total assets versus 42% in 2008. But interestingly, it’s in Germany and Spain, amongst the big countries, where banks maintain their weighting in absolute terms and in relation to their products.
The European Central Bank (ECB)’s non-conventional measures contributed 1,7 percentage points to Spain’s real GDP growth between 2014 and 2016, while also helping to cut the public deficit by 1,9 percentage points over the same period.
José Luis M. Campuzano (Spanish Banking Association) | It’s been balance sheet adjustments and the worsening of the deliquency rate which have been mainly responsible for the deterioration in banking margins over the last few years. It’s important for the ECB to establish a clear strategy for monetary normalisation for the future.
J.L.M. Campuzano (Spanish Banking Association) | From recent ECB statistics, there would seem to be a recovery in financing in line with the monetary authority’s implict goal when it implemented its extreme measures.
J.L.M. Campuzano | On Thursday, the ECB confirmed what many analysts were expecting: the limit on expansive monetary measures has now probably been reached, without this meaning there will be an immediate reversal. And the reason for this? Simply that the risks are more balanced now.
J. L. M. Campuzano (Spanish Banking Association) | Stable inflation centred around levels of 2.0%…A scenario dominated by rising inflation is as complicated as one where deflation and potential low economic growth can create a vicious circle difficult to exit. Especially in a context of high indebtedness.
Lately there is growing criticism of the ECB over its supposed “democratic deficit”. It is being accused of oversteppping the mark by being obliged to take “political decisions”.
I believe central banks don’t control long-term rates – which are decisive for investment – and that they can influence them in what we would call normal circumstances, namely when GDP is expanding and inflation is at its optimum level. The central bank trys to control the private market’s expectations, but it doesn’t always succeed.