Monetary policy is now the “number one threat” to the long-term existence of the eurozone, says David Folkerts-Landau, global head of research at Deutsche Bank. He reckons that trying to stimulate growth and inflation, while at the same time removing incentives for structural reforms, is “creating massive fault lines”.
“Over the past century central banks have become the guardians of economic and financial security. They have been endowed with the power to set interest rates to safeguard our currencies,” writes the German economist in a note to investors, News Market reported.
“Some central banks, such as the Bundesbank and Federal Reserve, are respected for achieving monetary stability over many business cycles, often in the face of political opposition. But central bankers can also lose the plot, usually by following the economic dogma of the day. When they do, their mistakes can be catastrophic.”
Folkerts-Landau says that the ECB, among other things, is getting less bang-for-its bucks with the current ultra-loose monetary policy and he worries that abundant capital is propping up businesses that would not be viable under normal conditions.
He adds that the ECB, which has just kicked off its corporate bond-buying program in an attempt to stimulate growth in the region, should never have usurped the role of savior of the eurozone.
“Its president (Mario Draghi) is disingenuous to blame politicians for failing to act. It is he who enabled them to postpone the hard choices. This has prevented a more sustainable solution and undermined our democratic processes. Furthermore, as policy keeps failing to deliver stability while creating a host of distortions in asset markets, it undermines our democratic process even more—contributing to the splintering of power and rise of fringe politics.”
Time for Common Sense
Folkerts-Landau says that by raising rates the ECB would instill confidence across the eurozone and buoy savers, and that the central bank needs to insulate national banking systems from sovereign debt problems.
“Rarely has an institution held such sway over the economic and political future of an entire continent. But this is not the time for slavishly following a doubtful economic dogma—it is the time for common sense. The longer the ECB persists with unconventional monetary policies, the greater the damage it will inflict on the European project it purports to be supporting”, he concluded.
Euro Slipping
ECB in its annual report released Wednesday said, the euro’s importance as a tool of the global financial system is dwindling, CNBC reported.
The euro has struggled to keep pace as a globally used currency in the face of low interest rates and poor global growth.
At 19.9%, the share of the euro in foreign exchange reserves has hit its lowest level since 2000 according to the ECB’s report on the currency’s role.
“Moreover, the share of the euro in foreign exchange reserves has fallen by almost three percentage points since its peak in 2009, i.e. before the onset of the eurozone sovereign debt crisis,” the report said.
“The euro remained the second-most important currency in the international monetary system, but with a significant gap to the US dollar,” the ECB added.
As a comparison, the US dollar makes up 64% of FX reserves, but according to IMF and ECB calculations is also falling, down by 5% since 2007.
Following the announcement of the ECB asset purchase program, use of the euro in foreign currency debt issuance peaked in early 2015, but has since faded as levels of dollar-denominated debt rose.
For cross-border loans, the use of the euro actually ticked up in 2015 but the report said volumes remained limited outside of the European Union.
