ECB is expected to offset euro area’s fiscal tightening

by Dramelin 9:30 PM 0 comments

That won`t be easy because serious socio-political issues will be raised as tighter budgets continue to erode Europe`s unaffordable welfare states.
These issues are called (painful) structural reforms.
Countries like France and Italy find them politically flammable.
Striking down elaborate labor protection laws is strongly resisted; it is part of the class warfare, and its short-run impact leads to losses of jobs and incomes.
But windows of opportunity may be opening up.
The new government in France seems likely to have a comfortable parliamentary majority.
That could help a quick passage of labor market reforms, especially if the rising business confidence and low credit costs were to lead to stronger investments and a new wave of job creation.
A similar scenario could happen in Italy, based on perhaps overly optimistic estimates that a reviving Democratic Party might benefit from political support of its earlier right-wing opponents.
Regional elections today (Sunday, June 11) will tell us something about that.
Either way, Italy`s anti-EU and anti-euro forces seem now much more subdued than a few months ago.
That leads us back to the ECB and a key question: Can the Europe`s central bankers deliver? As things now stand, the ECB should have no problem maintaining an accommodative policy stance in an economic system where 9.
3 percent of the labor force is out of work, and where the core price inflation was declining to 0.
9 percent last April.
The latest data indicate that most of the ECB lending goes to public sector borrowers.
That credit aggregate has been growing at an average annual rate of about 10 percent in recent months, while lending to the private sector was increasing by less than 3 percent.
Lending to households and non-financial corporations is still weak.
Credit extended to these two key sectors of the economy grew only 2.
4 percent in the year to April, indicating a slow recovery of private consumption and business investments.
But that could soon change for the better.
Household and business confidence in the euro area is rising after anti-EU and anti-euro political forces were trounced in recent French and Dutch elections.
These new developments are reinforcing the commitment to the monetary union and to further integration steps to strengthen the euro area management.
A demand for euro area assets is growing.
The euro has gone up 3.
6 percent against the dollar and 1.
5 percent in trade-weighted terms since the French elections on May 7.
The ECB should like this, because a strong euro is a powerful inflation dampener in a highly open euro area economy, where the external sector represents about two-thirds of its GDP.