World Economy

Europe Must Turn to Monetary Policy

Europe Must Turn to Monetary PolicyEurope Must Turn to Monetary Policy

The greatest impact on real economic activity throughout Europe will come from fiscal measures rather than any more monetary stimulus, according to head of European equities at Fidelity International Paras Anand.

Anand said that fiscal measures should now be brought in not only at the level of national governments but also at regional and local government level, Portfolio reported.

“As expected the ECB have moved the eurozone further into negative rate territory and increased the scale of stimulus to spur on the modest recovery in the region and raise the stubbornly anchored rate of inflation,” Anand said.

“As with the recent similar moves at the Bank of Japan, this has been welcomed neither with a material response from the level of the currency, nor a strong vote of confidence being expressed in equity markets.”  

Anand noted however that cause and effect relationships are “notoriously difficult to divine in complex systems” so it is possible that in the future the recent move by the ECB is seen to have had a positive effect on the real economy.

“The truth is that the contrary perspective is equally valid which is that such measures do little to stoke genuine confidence in the stability of the economy and risk conflicting with the assertion that systemic risk in the banking system has been contained even under stressed macroeconomic conditions,” he explained.

Another observation worth making in Anand’s view is that a recovery in reported inflation is arguably a function of time. Items in the basket which have dragged most significantly on the published data, energy and food, have stabilized and are showing signs of modest recovery, he noted.   

“Meanwhile, as in other developed markets, real wages are showing clear signs of improvement,” Anand continued. “This is obviously happening at an uneven rate which is typical for a region of such heterogeneous economies but the above suggests that as these effects work through, inflation will return towards the long term average, possibly much sooner than consensus expectations.

“One of the most enduring lessons of Warren Buffett is that investment, inactivity can be the most value positive course of action. I wonder if an ECB arguably too prone to intervention might benefit from this advice,” he added.

  ECB Gets Tough

Fund managers weigh in after ECB President Mario Draghi jolted markets with his bold monetary policy moves.

The European Central Bank on Tuesday announced strong measures to address economic growth, including a cut in the deposit rate and in the interest rate on main refinancing operations; a €20 billion ($22.2 billion) increase in the monthly pace of asset purchases to €80 billion; and a new targeted longer term refinancing operations facility.

Moreover, the new TLTRO facility “will allow European banks to borrow money from the ECB at a negative rate, potentially as low as -40bp (the new deposit rate after Tuesday’s 10bp cut) for 4 years, subject to the amount of loans they provide to the real economy.