European policy U-Turn deserves kudos

European policy U-Turn deserves kudos

Earlier this month, the European Central Bank (ECB) followed the Federal Reserve in making a major monetary policy U-turn. This move should be welcomed in light of Europe’s rapidly deteriorating economic outlook. However, it is questionable whether the ECB’s policy measures will be nearly enough to prevent the European economy from again succumbing to an economic recession. This would seem to be especially the case at a time that Germany cleaves to a budget austerity policy and at a time that the Trump administration undermines European investor confidence by threatening to impose punitive import tariffs on European automobiles. In 2008, on the eve of the global economic and financial crisis, the ECB, under Jean Claude Trichet’s leadership, made the egregious mistake of raising interest rates. Fortunately, as storm clouds now gather over the European economy, Mario Draghi’s ECB does not appear about to repeat the same mistake. Rather, recognizing that the European economy is slowing and faces a challenging global economic environment, the ECB has now slashed its European economic forecast and taken steps to provide the economy with some support. Those measures have included taking any interest rate increase for next year off the table as well as indicating that the ECB stands ready to revisit its decision to reduce the size of its balance sheet. Welcome as the ECB policy U-turn might be, refraining from interest rate hikes and freezing the size of the ECB’s balance sheet alone would not appear nearly sufficient to right the ailing […]

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