The ECB’s decision to extend, but taper, its QE does not herald an
early tightening of policy. The main policy (deposit) rate is likely to
stay negative in 2017, & the fiscal side should be activated.
While helpful in addressing the symptom, deflation, Mr Draghi
cannot alone be expected to solve the underlying problem - a
monetary union devoid of economic union. This will take years.
We update our Competitiveness Analysis to highlight the progress
so far. Despite improvement at the euro-wide level, shifts in
individual members’ competitiveness are still too disparate.
After a decade of deterioration, Italy & Spain’s positions have
improved significantly since austerity. But, while encouraging, it
brings economic & social costs, with reform-fatigue building.
So, with 2017 such a highly-charged political year in Europe, any
contagion - unlike 2008 - is more likely to be political rather than
financial. And, with the monetary engine already overloaded, it
looks time to also crank up the fiscal side...
The ECB’s decision to extend, but taper, its QE does not herald an