There’s something not entirely convincing about the European Central Bank’s attempts to calm the markets.
On Thursday it maintained interest rate levels, with Mario Draghi assuring that the BCE would maintain an expansive monetary policy of buying up to €80 billion worth of public and private debt a month until inflation levels return to approximately 2%.
So far, this is a correct monetary policy, albeit one not shared by Germany. But Draghi and his advisors know that this policy, the best at a time of (virtual) stagnation coupled with (near) deflation, comes at a price and therefore will have to be changed at some point in the future.
The price of this policy is beginning to show. Italy’s banking system is being suffocated by bad loans, and thanks to negative interest rates is failing to make any money. The rest of Europe’s banking systems face similar problems in making a profit, although they don’t have to deal with so many bad loans. In any event, the situation for Europe’s banks will worsen notably if these policies continue and the EU’s economy overall doesn’t return to modest growth.
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The ECB is aware of all this: quantitative easing will continue, even though the banking system is awash with cash, not much of which is being lent out. But another two years of the same policies raises the risk of new banking crises. For this reason, among others, an aggressive monetary policy needs to be paired with an equally aggressive fiscal policy, which is to say a public investment plan for Europe financed by the European Investment Bank or backed by the debt the ECB is buying. Europe needs a new monetary policy.
English version by Nick Lyne.