The Fed and the ECB: Moving at different speeds in the same direction

by Dramelin 10:00 PM 0 comments

The euro area`s price stability looks good.
The current core rate of inflation stands at 1.
2 percent — substantially below the medium-term target of 2 percent — prompting the ECB`s statement last week that "an ample degree of monetary stimulus remains necessary.
" The fiscal policy is the other big difference compared with the U.
, and an important reason for the ECB`s "ample degree" of credit easing.
France, Spain and Italy — accounting for one-half of the euro area GDP — have to maintain a restrictive fiscal stance.
France and Spain are required to bring budget deficits down to 3 percent of GDP, and to balance the books in the next few years, while Italy has to reduce its public debt down from a colossal 158 percent of GDP.
As an aside, one may also note that the ECB`s monetary easing will help to keep the euro`s exchange rate at a level that could stimulate strong export sales in countries suffering from weak domestic demand.
This year, for example, an estimated $400 billion surplus on net exports of goods and services will make a positive contribution to the area`s growth and employment.
The economic fallout from serious political instabilities in the European Union is another problem that makes a big difference for the settings of American and European monetary policies.
Spain now not only has to deal with difficult fiscal and structural policies, but its minority government is also facing a serious challenge to social peace and territorial integrity.
Things have already gone so far that the depressive economic impact of the Catalonian quest for independence will transcend Spain`s 12 percent share of the euro area`s economy.
There is no telling indeed where the contagion of Catalonia`s separatist movement will stop in Europe`s complicated political landscape.
Italy`s regional problems, for example, have been exacerbated.
Similar to the case of Catalonia, the rich regions of Lombardy and Veneto, and probably Piedmont, want to keep their fiscal revenues for themselves instead of sending the money to Rome and to the perennially underdeveloped Mezzogiorno (Italy`s poor southern regions).
Germany`s federation has not been threatened yet, but, who knows, the rich and conservative Bavarians apparently cannot stand the idea of sharing a coalition government with the leftist Greens.
And the Bavarian concerns seem to be spreading to the German Christian Democratic Union (CDU).
Ominously, even the erstwhile supportive center-right media are now asking: Where do we go with Chancellor Angela Merkel? The German coalition talks are going nowhere, that`s for sure.
The new elections are looming, and the union between the CDU and the Christian Social Union in Bavaria now sounds like it could be looking for a new leader.