MONETARY POLICies Growth could be a problem
However, if the economy remains weak as the second half of 2012 approaches,
then the market
might start to widen aggressively as it may conclude that austerity is making it harder for countries to grow out of their debt burden. There may be doubts over the willingness to continue to pursue such policies and doubts as to whether the ECB has the mandate or the desire to continue to maintain purchases at a level that continues to keep markets stable
some kind of dramatic treaty
or a large scale
transfer
change fiscal
from
without ECB
The Securities
the core to the periphery. The ECB may still see its involvement as temporary, which will likely be a problem as the year progresses.
Why monetization is difficult to embrace in Europe
The first objection to the ECB being more aggressive in its
intervention is obviously the one coming from the current treaties, rules and laws governing the EU and the ECB itself. Instead of going deeper into legal ground I think it is worth concentrating on the ultimate reasons why the attitude in Europe is so different from the one prevalent in Anglo-
FX
Southern European worker is 1/4 to 1/3 less productive than the average Northern European worker. Throwing free money at them will only make them less
competitive.
would be achieved is inflation. Monetization
States,
Kingdom Japan
Instead what encourages
consumption, which largely explains why the
United United and
have
used the tool in recent years. But in the European case, it would be
encouraging
c on s ump t i on in only part of the
currency
zone, in an area that is already a
substantial future most market evolution Markets players of the
Programme are
is trying
Saxon countries. In the end it is a political matter and treaties will be changed if the political will is there. In the Northern European mind, monetization the
will core European not solve problem:
competition. Southern Europe is already non-competitive with Northern Europe. The average
ECB’s what
to gauge planning their investment decisions
i mp o r t er . S o u th e rn Europe
needs
to get their c on s ump t i on pr o du c t i on in
Mo net iza t io n does
balance. the
opposite, deepening the existing imbalances while boosting inflation. Now inflation does eat away at the relative value of debt. But it also eats away at the relative value of assets. Since Southern Europe is more debt-driven than asset-driven economy, it is easy to see why countries in the South see monetization as desirable
FX TRADER MAGAZINE January - March 2012 39
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