We still do not know whether the victory of Emmanuel Macron in the elections to the normalization of European politics, and to unity and understanding in the EU. But we can be quite sure that this victory will exacerbate disputes about the normalization of European monetary policy.
Despite the fact that the European Central Bank at the meeting on 27 April rightly left its policy unchanged, the discussion began with the participation of different members of the management Board of the Bank, (with due tact) expressing the opposite point of view about when and how to put an end to monetary stimulation. With regard to timing, the improvement in economic activity and the rise in overall inflation implies a need for the imminent removal of monetary stimulus. However, core inflation, excluding volatile energy prices and the products remain stable at 1%. Despite the fact that Germany and Ireland can be ready to failure, then Italy and Portugal having lower rates of core inflation, higher rates of production decline and a greater number of problem loans — not ready for it. If the chain that binds the Eurozone, rests only on its weakest links, these facts imply a later and more gradual abandon the current policy. As for the question of how this can be done, then the problem is in the order of committed actions.
The initial strategy of the European Central Bank, as the strategy of the US Federal reserve, it would seem, is to pay monetary incentives are reversed: first, to reduce quantitative easing (the most recent measure), and then to normalize interest rates, and finally to reduce the balance sheet of the Central Bank of Europe. In other words, this strategy — as the path by bread crumbs from the tale of Genzel and Gretel. Europe, however, needs a non-standard waiver of its non-standard monetary policy. The region that develops at all speeds, having a variety of weaknesses, should strive for a more balanced rejection of the existing course. In particular, first the European Central Bank must cancel the negative interest rate, then gradually reduce monetary stimulus, at first only for a stronger economy; and then to normalize interest rates to a positive level; and the last to refer to the volumes of the balance sheet of the European Central Bank. The first step should be the abolition of measures with the most insignificant macroeconomic impact of negative interest rates European Central Bank. An exceptional strategy only partially strengthened through the Bank rate, as banks are afraid of losing depositors. The lower profitability of the Bank played a more significant role than the increase in lending. Tangible unpredictability negative rates also provoked a political backlash against the European Central Bank, especially in Germany. This policy can be waived with minimal damage. While raising negative rates to zero may have a positive impact on the currency (but not contribute to her rehabilitation), the risks appear to be minor, as the tightening Federal reserve will push the Euro in the opposite direction. The second step will be the gradual reduction of monetary stimulus by bringing the monthly asset acquisitions from EUR 60 billion to zero. But instead of the extensive retreat based on fractions of States in the capital of the European Central Bank, the reduction should be focused on countries not in need of stimulation (e.g. Germany) and the slower way to those who need it (e.g. Italy).
Accelerated rejection of the incentive of Germany will also soften the pressure on the rates posed by the deficit after the acquisitions of the assets of the European Central Bank. At the same time, a slower departure from the incentive of Italy will be a response to the reality that the ECB can neither accept nor ignore: a sharp decline in asset purchases before next year’s elections in which one of the main issues is already stay in the Euro area, could exert pressure on the government bonds of Italy and, thus, to the already weak Italian banks are major holders of these bonds. The repetition “loop” of banks and government bonds like the plague that swept through Europe five years ago, becomes a problem for all of Europe.
The third step will be the normalization of the refinancing rate to a positive dynamics. So far as it speaks about increase of rates of refinancing in the future, it will affect the yield curve at all maturities. Given the strong impact on money and banking, this step needs to be taken at a later stage of recovery. In the last turn of the European Central Bank must consider when (and whether to do it at all) to reduce its balance sheet to pre-crisis levels. However, it is difficult to imagine such a negative Outlook of inflation, which would have demanded a sharp reduction in the monetary base. The possibility of reducing this speaks in favor of postponing the decision. In global terms, the desire for normalization led to a policy of alternating stimulation and restraint. In 2012, the ECB expanded its balance sheet next year, it rapidly reduced and then expanded again. After three rounds of monetary stimulus, the fed began normalizing rates in 2015, then took a long pause. The Bank of Japan retracted the statements about the victory over deflation. The ECB wisely refrained from haste in this direction at its last meeting. His next task will be to “fit” a future waiver of stimulation to various weak spots and experiencing the rehabilitation of the regions of Europe.
The author is Deputy Chairman of the government bonds and state institutions Morgan Stanley.
