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...