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Ahead of the curve: Euro-zone - time for Plan B...

  • 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...

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Mark Miller, Head of UK & MENA Institutional