Finland Times

 

The European Central Bank's announcement on Thursday to switch on the money tap shed light on the deflation risk stalking the euro zone and reminded the elites, who are gathering here for the World Economic Forum's (WEF) annual meeting, of the divergence among policies from different central banks.

 

ECB OPEN VALVE

     

The European Central Bank (ECB) on Thursday decided to purchase over 1 trillion euros in public and private sector bonds by the fall of 2016 to counter the deflationary risk and possible stagnation.

     

ECB President Mario Draghi said the purchasing would start in March 2015 with a monthly amount of 60 billion euros (about 69.48 billion U.S. dollars), and was intended to last until the end of September 2016, but would in any case be conducted until the ECB saw a sustained adjustment in the path of inflation which is consistent with its medium-term inflation maintenance target of below, but close to, 2 percent.

     

Draghi said the decision to kick off the rescue program was made against a backdrop that inflation dynamics continued to be weaker than expected.

     

Earlier on Thursday, the ECB decided to keep key interest rates unchanged at a historically low level.

     

Annual inflation rate in the euro zone dipped to negative territory in December 2014 and reached minus 0.2 percent despite ECB's previous stimulating efforts of cutting interest rates and buying private sector bonds and asset-backed securities.

     

Draghi stressed that the ECB has exhausted most other options, and did not have many choices apart from QE to combat a near-stagnant economy and avert sliding into deflation as a drop in prices was posed to worsen the situation.

     

The full-blown monetary measure deployed by the ECB was widely believed to have successfully helped to boost the U.S. and British economies.

 

QE BEING NOT ENOUGH

     

Participants in the WEF Davos annual meeting, though acknowledging the necessity of ECB's latest step, casted doubt over the program, saying that monetary policy was only part of solutions for Europe's problems.

     

German Chancellor Angela Merkel on Thursday stressed that should the QE was announced or not, European leaders must not be diverted from continuing with meaningful structural reforms, and urged them to take urgent structural reforms and fiscal consolidation so as to finally get out of the crisis.

     

Axel Weber, head of Switzerland's biggest bank UBS and former governor of the German central bank, stressed that structural reforms were more important than monetary policies, being vital to address the daunting challenges faced by the euro zone, including the obstinately-high unemployment, weak growth environment and inflexible production market.

     

Weber said the ECB has continuously bought time for the European policy makers to fix the crisis via real reforms, but Europe has "lost good opportunities to do the right things".

     

The senior economist also expressed his concerns that Europe has a common market and a single currency, but no fiscal union nor risk-sharing among governments. As for the much-needed structural reforms, it is not the domain of European Commission but the job of national governments.

     

Such a mismatch makes a single monetary policy focusing on QE much more difficult to achieve the targeted effect, he said.

     

Lawrence Summers, Professor with Harvard University and former U.S. Secretary of the Treasury echoed this less-promising expectation on effect of ECB's QE from different perspectives of the already-very-low interest rates there and of the weaker ability of European banks to transmit monetary expansion to the wider economy.

 

DIVERGENCE BEING NEW RISK

     

ECB's latest Fed-style QE also drew attention to the current policy divergence among different central banks to inject vigor into their own economies. The trend of such a self-contained compartments in an era of globalization, where different economies are closely knit, raised concerns among participants in the WEF Davos meeting.

     

Weber described the current international monetary system as "seriously unanchored", stressing that most central banks were pursuing policies that exclusively focus on their own economy and their own needs.

     

The general global picture in this regard could be summarized as a massive QE in Europe and Japan, the bulk of world economies on the easing path, and the U.S. and Britain intending to tighten policies.

     

The unmatched pace was regarded by the senior economist as a major concern that could affect foreign exchange rates and deliver the volatility for global financial markets.

     

Min Zhu, deputy managing director of the International Monetary Fund (IMF), saw eye to eye with Weber over the divergence in central banks' policies, listing it as a new global economy risk for the year ahead.

     

Apart from ensuing volatility, Zhu added that the different orientations of central banks monetary policies not only change the size of liquidity but also its structure.

     

Gary Cohn, president and chief operating officer with Goldman Sachs, said the world is in a currency war, and to weaken one's currency was widely held as one of the easier ways to stimulate its own economy.

     

According to Zhu, such a scenario -- should there is -- absolutely has no winners. He appealed to the international community to invest joint efforts to prevent it.

     

Possible policy coordination among central banks could be "a good idea", and could minimize the volatility in global markets, IHS chief economist Nariman Behravesh said at WEF.

     

To coordinate policies demands a clear vision over current economic situation and its trends, and as well as consistent steps from different central banks, said Lin Boqiang, a professor with Xiamen University.

     

Otherwise, markets would have conflicting expectations and then intensify the volatility, he added.