Why the procrastination of the European Central Bank is worrying

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FIGAROVOX / ANALYSIS - Hubert Rodaire analyzes the deflationary risk weighing on the euro zone and denounces the stagnation of the monetary policy of the European Central Bank.

Hubert Rodarie is Deputy Chief Executive Officer of the SMA Group.

Three major central banks have just held their monthly meeting.

The US Federal Reserve has continued to raise its key interest rates and therefore its approach to normalize its policy. It is based on a favorable context in terms of activity, employment and inflation, all reinforced by high oil prices because the United States has once again become an oil country. The Bank of Japan and the European Central Bank (ECB), on the other hand, have left their arrangements unchanged.

Is it a coincidence? Alas no. Beyond their differences, the constraints weighing on these two monetary zones have common characteristics: a mercantilist policy that favors a high trade balance and, to protect this balance, the structural need to have lower inflation than their competitors world. For the last 10 years, the globally deflationary world context has weighed heavily on domestic demand and conditions in Japan and the euro zone. It feeds the dissatisfaction of the once well-to-do European populations who find themselves increasingly trapped by the dual competition of the poor, immigrant and non-migrant, and of robotization, making it seem irreversible that they will be forced out of industrial production already suffered during the relocation process. of the last thirty years.

For the past 10 years, the deflationary environment has been hitting the Eurozone's domestic economy very hard.

The ECB has announced the phasing out of its purchase program (QE). But the only maintenance of the stock will require annual purchases always colossal (182 billion over the next 12 months). It has pushed back any increase in its key rate beyond the summer of 2019. Are its decisions wise and relevant?

From our point of view no. Admittedly, the ECB has satisfied the mercantilist side because, since this announcement, the euro has fallen sharply against the dollar. But is it wise? Not sure. Because this decision does not take into account the dynamic that has begun since the arrival of DJ Trump and which is revealed little by little. It is the refusal of the status quo on the world economic organization confirmed for more than 10 years by the monetary policies of all countries.

This refusal gradually takes hold, one would dare to say carefully, beyond the excesses of communication. The extension, month after month, of US taxes to 25% on imported products actually installs the revaluation of the Chinese Yuan, which should have occurred for several years both to temper the Chinese activity and to enrich its consumers to curb the excessive movement of relocation suffered by Western countries.

Of course, these new balances are not obvious to target! But we must anticipate and give back to the euro area the means to face it. To do this, it would first be necessary to rely on the initiative capacities of European entrepreneurs by giving them back a financial system with a free rate market. That is to say, whose operation would no longer be biased by a monetary policy administering de facto rates; that is to say also with monitored actors, and no longer administered, through standard procedures.

This free market is the only proven system for selecting the right investment projects. It is all the more essential in an environment where liquidity will become scarce.

Unfortunately, the decisions of the ECB still delay this necessary resettlement. Procrastination or loss of confidence in principles of freedom yet still displayed? In both cases, one can worry.

Hubert Rodarie

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