quinta-feira, 28 de agosto de 2014

ECB QE: will it happen and what next?

Markets’ initial response to Mario Draghi’s Jackson Hole speech has been to inch up the probability that the European Central Bank will finally enact full-blown quantitative easing, or large-scale asset purchases, although the ECB president’s speech was sufficiently Delphic to cover a wide range of possibilities.

With valuations in some markets at record levels, particularly European government bonds, it is at least as important to consider how markets are likely to react if and when QE is announced, as it is to consider the likelihood of the announcement itself.

We were told at Jackson Hole that the ECB governing council would “acknowledge” that medium- and long-term market-implied inflation expectations are becoming unanchored; and Mr Draghi also expressed a new, softer stance on fiscal austerity.

But the governing council can hardly deny that markets are pricing in ever-lower inflation expectations. And rather than implying some sort of joint easing (fiscal stimulus matched with more monetary stimulus), the softer stance on austerity may be presented as a new additional reason for the ECB to hold off from full-blown QE.
QE or not QE?

So Mr Draghi’s speech may presage the announcement of QE. But it is equally compatible with the continuation of the existing ECB stance that the measures already announced at the June meeting (the negative deposit rate, targeted longer-term refinancing operations, and eventual asset-backed securities purchases) have the capacity to be effective and need time to work, with QE as a tool in reserve.

While the path of ECB policy remains unclear, the extreme levels of European government bond markets demonstrate growing doubt that the ECB will deliver the policy response needed to revive growth in the euro area.

Market pricing of future inflation has also moved to levels suggesting scepticism that the ECB will meet its inflation target over a two- five- or 10-year horizon.

As a result, yields on 10-year German Bunds have fallen below 1 per cent – nearly 150 basis points below equivalent US Treasuries. This is close to the widest negative spread since the euro was introduced. Spreads of less than 50 basis points above 10-year Japanese government bond yields are also the lowest positive spread in 30 years or more. This is a market pricing in convergence towards a deflation scenario, not economic revival.

The fall in Bund yields has dragged down yields on other European sovereign bonds, which on the face of it is encouraging. But it is notable that peripheral sovereign 10-year yield spreads versus Bunds are above June’s levels. That implies an increasing credit risk premium.

For the moment, the core-peripheral risk premium is still capped by the low level of bond yields around the world, as well as by the prospect of support from the TLTROs (cheap loans available to banks), and of full-scale QE if necessary.

But look ahead: within months, Federal Reserve QE will end; within a few quarters, the Bank of England and the Fed will probably have started raising interest rates; uncertainty regarding take-up of the TLTROs will persist; and if the ECB again postpones QE, market scepticism is unlikely to decrease. Ultimately, it seems it will become increasingly risky for the ECB to continue to postpone QE.
Market reaction

So what will be the markets’ reaction if ECB QE is announced? Given the record valuations already reached, some of the responses may be the opposite of what one might normally expect.

The US and UK experience is that the announcement of QE raises inflation expectations and cuts real yields, overall reducing nominal 10-year yields. But because the ECB has waited so long to act, both 10-year break-even inflation and 10-year real yields are already much lower than they were in the US when the Fed started its QE programmes.

An announcement of ECB QE is likely to raise inflation expectations much more than it would lower the real yield, meaning the nominal 10-year Bund yield would rise rather than fall, by 40-50bp. At shorter maturities (up to five years), though, the yield curve would remain flat, anticipating that policy rates will stay low for years after the inception of QE, as has been the case in the US, UK and Japan.

For the eurozone periphery, QE would see 10-year yield spreads over Germany fall to about 100bp as credit risk premiums diminished. But with Bund yields rising, this spread narrowing would probably not result in any meaningful fall in peripheral 10-year yields from their present levels.

Finally, it is likely that ECB QE would be moderately bearish for US and UK government bonds, as the prospect of effective stimulus for the euro area would remove one of the impediments to the normalisation of rates in the US and UK.

Laurence Mutkin is global head of G10 rates strategy at BNP Paribas

Fonte: FT

quarta-feira, 27 de agosto de 2014

Marina, codinome instabilidade política e econômica.

Na democracia nem sempre o resultado é do nosso agrado e este é caso, ainda não concretizado, da eleição da Sra Marina para Presidente da Republica.  Ela deve ter lá seus meritos, mas confesso que, apesar   de todo o meu esforço, ainda não consegui encontra-los.  A retórica dela é impecável, ainda que longe da maestria do grande Cicero: no máximo a colocaria ao lado de Obama que, com uma bela retórica, conseguiu ganhar a vaga  da Hillary Clinton, que era a candidata muito melhor preparada. Deu no que deu e agora é tarde para chorar sobre o leite derramado. Felizmente, ainda não é o caso do Brasil:  a boa performance na pesquisa eleitoral no momento atual , não implica em vitoria certa nas urnas, exceto se o terceiro colocado jogar a toalha e reagir à queda, como se ela fosse um nocaute. Não me parece ser o caso. Melhor levantar,sacudir a poeira  e dar a volta por cima, como nos ensina um velho cantor popular.

Há candidatos para todos os gostos, mas seguramente Marina é a pior de todos. Não tanto pelas propostas, mas pelo histórico de incapacidade de fazer política devido ao seu messianismo que, como sabemos,  na política, não raro tem um forte componente autoritario. Ela acuso os dois maiores partidos, PT e PSDB, de serem responsaveis pela divisão do pais que ela e somente ela, poderia resolver liderando uma governo onibus, ou seja com a participação de todos. Dificil levar a serio este discurso , haja vista, a sua dificuldade de relacionamento com os membros do partido que a hospeda, para não mencionar sua participação no governo Lula. Divisão, conflito e a política baseada na idéia de predestinação, são as marcas do agir político da Marina. Se eleita, será um desastre. A repetição da trágica experiencia dos governos Janio e Collor.

Espera-se que a direita e a centro direita tenham aprendido um pouco com as aventuras em que se meteram na história do país no pós guerra e consigam resistir ao canto de sereia  marineiro. Instabilidade política e por consequencia instabilidade econômica não interessa a ninguem.

terça-feira, 26 de agosto de 2014

Martin Wolf: Opportunist shareholders must embrace commitment

Limited-liability, privately owned joint-stock companies are the core institutions of modern capitalism. These entities are largely responsible for organising the production and distribution of goods and services across the globe. Their role is both cause and consequence of the revolution in the scale and diversity of economic activity that has taken place over the past two centuries.

Almost nothing in economics is more important than thinking through how companies should be managed and for what ends. Unfortunately, we have made a mess of this. That mess has a name: it is “shareholder value maximisation”. Operating companies in line with this belief not only leads to misbehaviour but may also militate against their true social aim, which is to generate greater prosperity.

I am not the first person to worry about the joint-stock company. Adam Smith, founder of modern economics, argued: “Negligence and profusion . . . must always prevail, more or less, in the management of the affairs of such a company.” His concern is over what we call the “agency problem” – the difficulty of monitoring management. Others complain that companies behave like psychopaths: a company aiming at maximising shareholder value might conclude it would be profitable – and so perhaps even its duty – to pollute the air and water if allowed to do so. It might also use its resources to obstruct an appropriate regulatory response to such (mis)behaviour.

The economic argument for shareholder value maximisation and control is that, while all other stakeholders are protected by contract, shareholders are not. They therefore bear the residual risk. This being so, they need to control the company in order to align the interests of management with their own. Only then would they be prepared to make risky investments.

Yet, while shareholders do indeed bear risks in their role as the insurers of solvency, they are not the only stakeholders to do so. A host of others are also exposed to risks against which they cannot be fully protected by contract: long-term workers; long-term suppliers; and, not least, the jurisdictions in which companies operate. Moreover, shareholders, unlike others, and particularly employees, can hedge their risks by diversifying their portfolios. A worker cannot normally work for many companies at the same time and nobody can hedge employee income by owning shares in other people, except via taxation.

The doctrine of shareholder value maximisation has allowed us to believe that the existence of these long-lived, hierarchical and powerful entities has not changed the market economy fundamentally. But, as Colin Mayer of Oxford’s Saïd Business School argues in his splendid book, Firm Commitment, this approach also misses the true purpose of the company.

Companies, argues Professor Mayer, are a mechanism for sustaining long-term commitments. But such commitments will only work if it is costly for the parties to act opportunistically. Moreover, it is often in the interests of all parties to bind themselves not to behave in such a way. But, with an active market in corporate control, such commitments cannot be made. Those who make the promises may disappear before they can deliver.

These commitments take the form of implicit – or not fully specified – contracts. Why do we have to rely on implicit contracts? Long-term commitments could in theory be managed instead by trying to specify every eventuality. About a second’s thought makes it clear that this is impossible. It would not just be inconceivably complex and costly. It would come up against the deeper problem of uncertainty. We have little idea of what might happen in the next few months, let alone the next few decades. If people are to make long-term commitments, trust is the only alternative. But a company whose goal is whatever seems profitable today can be trusted only to renege on implicit contracts. It is sure to act opportunistically. If its managers did not want to do so, they would be replaced. This is because, as Prof Mayer argues: “The corporation is a rent extraction vehicle for the shortest-term shareholders.” Aligning managerial rewards to shareholder returns reinforces the opportunism.

In practice, many capitalist economies do mitigate the risks of shareholder value maximisation and the market in corporate control. This is true of continental Europe, notably German companies. But it is also, notes Prof Mayer, true in the US, where the idea that management should be protected against shareholders is widely accepted in practice, if not so much in theory. The country that has taken the idea furthest is the UK.

Prof Mayer argues rightly: “The defect of existing economic models of the corporation is in not recognising its distinguishing feature – the fact that it is a separate legal entity. The significance of this stems from the fact that it is thereby capable of sustaining arrangements that are distinct from those that its owners, its shareholders, are able to achieve.” It is, in other words, in the shareholders’ interests not to control companies completely. They need to be able to tie their hands.

Prof Mayer’s suggested solution is what he calls a “trust company”, one with explicit values and a board designed to oversee them. He justifies such a radical switch with his scepticism about the feasibility and effectiveness of regulation. Less radical would be to encourage companies to consider divergent structures of control. One might be to vest voting rights in shares whose ownership can be transferred only after a holding period of years, not hours. In that way, control would be married to commitment. One could also vest limited control rights in some groups of workers. Yet this is not to argue that committed long-term ownership is always preferable. Family control, for example, has both weaknesses and strengths.

The right way to approach governance is to recognise the big trade-offs in managing and governing these complex, vital and long-lived institutions. We should let 100 governance flowers bloom. But the canonical academic model of the past few decades will rarely be the best.

Martin Wolf

Fonte: FT

segunda-feira, 25 de agosto de 2014

Jonathan Fenby: After decades of stalling, a day of reckoning for France

After two years of compromise, France’s President Normal has met his moment of truth. The stand-off between François Hollande, the Socialist head of state, and the left wing of his own party that erupted at the weekend, resulting in the purging of anti-austerity leftwingers from the government, has ramifications stretching far beyond the immediate confrontation. These will have significant implications both for the way France is run and for Europe. There is a distinct possibility of a period of chaos, reflecting the deep concerns at the root of the morosité under which the EU’s second state is labouring.

The catalyst was in itself no great surprise. Arnaud Montebourg, the outspoken leftwing economy minister, said in a speech and newspaper interview that conformism was an enemy and “my enemy is governing”. He added: “France is a free country which shouldn’t be aligning itself with the obsessions of the German right,” and called for “just and sane resistance”. He has followed an anti-German, anti-austerity line since the 2012 presidential election. As Mr Hollande has moderated the reflationary, high-tax measures on which he was elected, his minister has looked increasingly out of step. But when Mr Hollande appointed centre-left Manuel Valls as his prime minister in March after catastrophic local elections, Mr Montebourg was promoted along with his ally, Benoît Hamon, the education minister.

This was typical of Mr Hollande, who spent much of his career as a backroom party manager. For all the institutional power of his office, he is weaker than predecessors because, unlike them, he is a creature of his party rather than having moulded it to do what he wants. He is an accidental president who got where he is because of the scandal that enveloped Dominique Strauss-Kahn, who would otherwise have been the natural Socialist candidate in 2012.

Mr Valls was popular in the country – though less so now – and a president with an approval rating below 20 per cent needs all the help he can get. But the Socialist ranks see him as dangerously social democratic and an advocate of tough law and order of a piece with the left’s bête noire, former president Nicolas Sarkozy. Mr Montebourg’s anti-capitalist, anti-German rhetoric, meanwhile, goes down well with party members and backbenchers in the National Assembly.

Now, Mr Montebourg has thrown down the gauntlet and his ally, Mr Hamon, announced his departure on television news. The former economy minister said that France has to stop the economy being sunk by austerity, and he and Mr Hamon claim there is an majority in the EU opposed to the policies of German Chancellor Angela Merkel. Mr Hollande has to react if he is not to lose all credibility. He has told Mr Valls to form a government “consistent with the direction set for the country”. That means cutting the budget deficit and easing taxes on business to inject some life into the flatlining economy, cutting double-digit unemployment and getting to grips with structural factors that make France uncompetitive.

It is an agenda administrations of left and right have put off since the collapse of the race for growth under François Mitterrand in the 1980s, when Mr Hollande was a government adviser. The stakes are heightened by the political environment that has deteriorated to the point where some ask whether the Fifth Republic founded in 1958 can still function.

Mr Valls will form a cabinet of like-minded politicians, possibly reaching beyond Socialist ranks. That, and a rebellion by Mr Montebourg and ministers of his stripe claiming to represent true socialism, could split the party, costing it its parliamentary majority. A general election would be, primarily, a referendum on Mr Hollande, who pledged to be a “normal president” but has put in an abnormally ineffective performance. Unless he could stage a miraculous revival, he would inflict defeat on his supporters. The mainstream right UMP party would form a government in a period of cohabitation between a president and his opponents.

Such a grand coalition might be the only way to achieve structural reform but would face serious practical problems in governing. The mainstream right is divided between Mr Sarkozy on the comeback trail and former premier Alain Juppé, who this month threw his hat into the 2017 presidential ring. Marine Le Pen, leader of the far-right National Front, enjoys the highest personal approval ratings; because of the electoral system, the party would probably win few seats but that would enable it to step up its assault on the system. Meanwhile, Socialist rebels would form an opposition bloc on the other side, with vocal support from the hardline Left party of Jean-Luc Mélenchon.

This would bode ill for the euro, and for EU co-operation. The tendency to blame outsiders – primarily Mrs Merkel – for France’s woes would flourish amid the rising concern about national identity that lies at the root of the nation’s “morosité”.

Jonathan Fenby is author of ‘France on the Brink’

sexta-feira, 22 de agosto de 2014

Barry Eichengreen: The rules of central banking are made to be broken

The Federal Reserve’s Jackson Hole conclave may be dominated by technical discussions of abstruse concepts such as the non-accelerating inflation rate of unemployment, but one also detects an undercurrent of nostalgia. Central bankers are wistful for a past when monetary policy was conventional and its makers could focus on adjusting interest rates.

Specifically, the assembled are eager to end the extended period of zero interest rates. They want to wind down their purchases of mortgage-backed securities and asset-backed commercial paper. These programmes involve interventions in financial markets. They may have undesirable side effects, encouraging investors to over-reach in the search for yield. Their benefits can be questioned. Policy makers are anxious to bring them to an end.

This instinct has led to calls, not least in the Federal Open Market Committee, for the US central bank to raise interest rates. It has prompted a noisy minority within the Bank of England’s Monetary Policy Committee to do likewise. It has discouraged the European Central Bank from pursuing unconventional policies of its own.

It is a dangerous sentiment, this yearning for an idealised past in which central bankers could focus on moving rates by a notch or two, this way or that – much as a physician adjusts the drugs administered to a patient with high blood pressure. For as long as they have existed, central banks have been in the business of buying and selling not just Treasury bonds but also commercial paper and sundry other corporate obligations.

Making monetary policy has always been a complicated craft. Whenever there was an effort to reduce the art of central banking to a simple formula, be it an exchange rate target under the gold standard or an inflation target more recently, other problems – such as threats to financial stability – have had an awkward tendency to intrude. They will undoubtedly do so again. That should be a caution to those seeking to tie the Fed to algorithms such as the Taylor rule, a simple formula that purports to say how interest rates should respond to changes in inflation and output.

Why then did modern central bankers embrace the mistaken notion of mechanistic monetary policy? Part of the explanation is serial malpractice by central banks in the 1970s and 1980s. If policy makers could not be trusted to exercise discretion wisely, better to bind them to a simple rule.

Another factor was the increased sophistication of analytical models and methods. Fed staff first undertook a project using mathematical techniques adapted from engineering science to guide policy in the 1970s. Others quickly followed, believing that if the structure of the economy could be represented as a set of fixed mathematical relationships, interest rates could easily be fine-tuned.

Milton Friedman was among the sage observers who were careful not to take the models too literally. As early as the 1940s, he understood that uncertainty about the structure of the economy was too great. But the spurious precision of these techniques, and the false scientism to which they gave rise, encouraged central bankers to believe that their job was to implement an optimal feedback rule, barely more complex than the one that switches on the compressor before the contents of the icebox begin to melt.

Such an idealised world never existed and never will. Financial innovation marches onwards. The more financially sophisticated the world, the more difficult it is for policy makers to draw the line between money and credit. Threats to financial stability are like a jack-in-the-box. You can close the lid, but you cannot keep the jester down.

It is fanciful to suppose that central banks can regulate the economy while responsibility for financial stability is hived off to some entirely separate government agency. Nothing better demonstrates this than the UK’s experience with the Financial Services Authority, the regulator whose disastrous 12-year tenure culminated in the run on Northern Rock.

The question is where to draw the line. If it is appropriate for central bankers to warn against excessive risk taking and dubious financial practices, should they also weigh in on fiscal policies? On structural reform? On income inequality?

The temptations are great. Before weighing in on an issue, central bankers should apply three tests.

First, do they have special expertise? The BoE was put in charge of rationalising the British textile industry in the 1920s, and the results were not great. The central bank, as a bank, has special expertise on issues of money and credit, but not obviously elsewhere. It should mind the gap.

Second, the issue in question should have big implications for the conduct of monetary policy. For instance, given the high level of public debts in Europe, failure to reduce them could place intense pressure on the ECB to inflate. The ECB could reasonably weigh in on the fiscal problems of Europe’s heavily indebted governments. This, however, is not a licence to pontificate on fiscal policy generally.

Third, is the issue one the central bank can address without losing sight of its fundamental responsibility for price and financial stability? The ECB has resisted loosening monetary policy for fear that such a stimulus would reduce the perceived urgency of reforms. This misguided priority has thrust Europe to the verge of deflation. It is a prime example of what a central bank should not do.

Knowing where to draw the line is difficult. Like it or not, central banking is still more art than science.

Barry Eichengreen is author of ‘Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History’

quinta-feira, 21 de agosto de 2014

Dramas to match scenery at Jackson Hole

The annual August summits of the world’s top central bankers in Jackson Hole, Wyoming, have a dramatic mountain backdrop, but the conference titles are not exactly works of blockbuster film writers.

“Re-evaluating labour market dynamics”, the topic of this weekend’s symposium, appears deliberately dull, as if intended to keep financial markets in a summer slumber. Yet, like James Bond film titles, Jackson Hole summits have a habit of capturing the zeitgeist.

Famously, the 2005 summit was meant as an appreciation of Alan Greenspan’s years as US Federal Reserve chairman. In the event, it is remembered for propitious warnings about risks in the financial system from Raghuram Rajan, the International Monetary Fund’s then-chief economist who now heads India’s central bank.

Although academic sounding, this year’s conference subject is of wide significance. Labour market dynamics could determine the pace of monetary policy tightening in the US and UK; the latter may yet lead a rate-rising cycle.

With central banks maintaining their mesmerising grip over financial markets, much attention will be paid to any signals out of Jackson Hole. Even six years after Lehman Brothers investment bank collapsed, the challenges facing central banks have not diminished. Sensitivity is high to a possible turn in the interest rate cycle, which has driven yields to historic lows. A big risk is of fresh disruption as monetary policy makers react to widening divergences in performance between the world’s main economies.

Cycling and hiking

Despite the US’s relative robustness, expectations are for more dovishness from Janet Yellen, the Fed chairwoman, who is expected to see significant slack remaining in the country’s labour market and no need for early US monetary policy tightening, even as the Fed’s “quantitative easing”, or asset purchase programme, comes to an end.

But in the private discussions in Jackson Hole, where popular activities are hiking (as in walking, not raising interest rates) and cycling, the Fed’s dovishness may not be appreciated by the Bank of Japan and European Central Bank. Both would prefer a more hawkish Fed that led to a stronger dollar.

Haruhiko Kuroda, BoJ governor, arrives in Jackson Hole amid rising market scepticism about whether his aggressive quantitative easing will successfully drag Japan out of decades of deflation. Labour market dynamics are crucial in Japan, too. Wage growth is needed to generate inflation. While Japanese unemployment is low, demographics and productivity trends could thwart Mr Kuroda’s ambitions. A further bout of yen weakness would help.

Similarly, a weaker euro would help Mario Draghi, attending a Jackson Hole summit for the first time as ECB president. He is battling to prevent the eurozone falling into Japanese-style deflation. With eurozone second-quarter growth data last week showing the region stagnating, the ECB faces market pressure for Fed-style quantitative easing.
Escape routes

Mr Draghi, whose economics PhD is from the Massachusetts Institute of Technology, at least speaks a similar language to the Fed. Traditionally, the ECB disliked discussing “output gaps”, or measures of economic slack, which it regarded as impossible to measure in a timely fashion. But Mr Draghi happily uses such concepts when discussing ECB monetary policies.

With unemployment still at 11.5 per cent of the labour force, there is plenty of “slack” in the eurozone. But there is widespread scepticism about whether eurozone QE would work, not least from Jens Weidmann, the Bundesbank president (not attending Jackson Hole this year). A further depreciation of Europe’s single currency would offer Mr Draghi an alternative escape route.

Like cyclists, central banks are most effective when they are all travelling in the same direction, as immediately after Lehman Brothers’ collapse. Joachim Fels, international economist at Morgan Stanley, argues that the Fed, ECB and BoJ currently form an easy-money “peloton”, the group of cyclists at the front of a race who bunch together to reduce wind resistance.

Breaking away to raise interest rates is hard for smaller central banks because of the headwinds created, for instance, by an appreciating currency; a stronger pound would delay a Bank of England interest rate rise.

It might be easier for the Fed to pull apart, however, and divergences in performance between the US, eurozone and Japanese economies suggest the central bank peloton should break up. Whether that happens, and what turbulence it creates, could determine the script followed by financial markets once the central bankers have returned from their Jackson Hole weekend.

Ralph Atkins

Fonte: FT

quarta-feira, 20 de agosto de 2014

Draghi has to do, as well as say, whatever it takes

Mario Draghi does his redoubtable best to reassure us: the eurozone recovery, he tells us, is “on track”.

Rather than face the reality of stagnation, the president of the European Central Bank seems to have adopted the leitmotif of Olli Rehn, the former EU economic and monetary affairs chief, who for the past three years has asserted in defiance of all evidence that a turning point was in sight.

At this year’s annual conference of central bankers at Jackson Hole, Mr Draghi should change tack. His promise two years ago to do “whatever it takes” to save the euro captured the attention of markets. Now he should say what he will do to save the economy.

True, Mr Draghi faces an unenviable predicament. Some of his colleagues on the ECB governing council have opposed expansionary measures. ECB policy has therefore been based as much on words as on action. It is understandable that Mr Draghi might want to keep up a brave front. His promise to keep monetary union intact – and his vow that “believe me, it will be enough” – saved the eurozone. This was a huge achievement. But it did not lay the basis for a sustained recovery.

The clouds over the eurozone economy began to accumulate long ago. It is no use blaming unrest in Ukraine and the Middle East for its flagging economic performance. The road to stagnation did not originate in Gaza and Kiev, and there can be no doubt that it runs through Frankfurt and Brussels. Perceptions are important, but you cannot conjure an economic recovery by summoning the confidence fairy. There is no substitute for pragmatic, non-ideological policies that accept and confront the data – which tell us that current policies are failing.

Economic commentators conventionally define a recession as two consecutive quarters of declining output. That narrow definition belies economic reality, however. Under the chairmanship of economist Philippe Weil, the business cycle dating committee at the Centre for Economic Policy Research identifies economic cycles by looking at a wide range of indicators. It has twice warned that the meagre signs of a rebound in the eurozone since early 2013 were not enough to declare the end of the double-dip recession that started in the third quarter of 2011. It signalled concern that the economy could again go into reverse, or that sluggish growth could become the new, dismal normal of the eurozone.

The second quarter data are now in. Most of the optimists are finally silent. The three largest eurozone economies all failed to register growth. Observers are busy revising their output forecasts downward. Inflation is at 0.4 per cent, against an objective of below but close to 2 per cent. This is not a recovery, not even a fragile one. Nor is it a return to recession. It is a continuation of stagnation. We cannot expect that under present policies, and with weak global trade growth, a depreciation in the euro will help much. Nor will the provision of cheap funding under the ECB’s targeted longer-term refinancing operation. A comprehensive assessment of bank balance sheets will, if properly conducted, renew confidence in eurozone lenders, some of which have been under a cloud since the crisis struck in 2008. But this will not in itself lift investment demand.

European citizens must hope that their policy makers, in Frankfurt and in Brussels, will abandon further attempts to reassure us, and abandon their one-sided mantra of structural reform. The acute, pressing problem is aggregate demand.

Repairing the credit system, implementing serious reforms of state expenditure and taxation, creating more flexible labour markets, finally opening the services market to cross-border competition – all are indeed very important. But they will not liberate the eurozone from stagnation.

Lightening the load of debt on private and public sector balance sheets requires a convincing return to growth. That will not come from policies such as raising bank capital and primary fiscal surpluses, which do not stimulate economic activity.

Seriously expansionary monetary and fiscal policies are both necessary and urgent. When will the ECB acknowledge that it is so far from achieving its inflation mandate that the eurozone risks slipping into deflation? When will it do “whatever it takes” to achieve it? Fiscal austerity was intended to bring public sector debt under control. Yet debt-to-GDP ratios have actually risen as a result. When will the commission acknowledge that its strategy has failed?

Much has been said about the need to maintain the credibility of European monetary institutions. Too often, that has been an excuse for inaction. Yet a return to economic growth is what is needed to restore credibility. Failure and continued stagnation could destroy the ECB, the European Commission, and the European project.

Richard Portes is professor of economics at London Business School. This article was written with Philippe Weil of Université Libre de Bruxelles

Fonte: FT