ECB’s bond buying unlikely to bring growth

Mario Draghi has bolstered capital markets by hinting he will shortly start buying sovereigns in a desperate attempt to reverse current deflationary pressure. He will meet fierce opposition within the ECB Council as diehard hawks regard this move as tantamount to profligacy. They see widespread structural reforms as the only potential remedy whatever the social and political cost. Even if they are right in pointing out that the lack of flexibility is the main hurdle the European economy faces in securing higher growth rates, no government will willingly impose unpalatable medicine whose results can only be reaped well beyond the next general election.

Public bond buying has the merit of injecting liquidity outside of banking balance sheets, regardless of what credit institutions will do. Yet, it amounts to a fund flowing scheme likely to increase asset prices whose impact on demand is far from clear. Interest rates will come down but, as recent experience shows, potential debtors will not flock into banks as long as consumption and investment fail to recover. Thus, most capital injections may only serve to finance a surge in bond and share quotes.

Better expectations are the driving force for growth. As long as private demand fails to surge, there is little chance recovery will either. Disposable income has suffered sizeable cuts in the face of dwindling wages, uncertain employment prospects, social welfare downsizing and higher taxes. No wonder, citizens are so reluctant to indulge in higher expenses. Only a switch in fiscal policy stance, on a coordinated basis, could provide the kind of stamina the Eurozone economy badly needs right now. Sooner or later, governments will be forced to act. Otherwise, a prolonged growth hibernation will freeze our continent.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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