martes, 22 de abril de 2014

What Is Draghi Waiting For?

Inflation in the euro area has fallen below one percent in recent months. Even Spain entered deflation in the last month. This fall in inflation, coupled with slow growth, has made many remember that this crisis can end as "Japanese style," referring to the many years in which Japan has experienced a low growth rate and a very low inflation.

In this situation, it seems clear that the European Central Bank should act. Since interest rates are already at record low, all expect the ECB to announce unconventional measures like the American style QE, which could increase inflation and give a small boost to the economy. However, recent history has shown us why Mario Draghi has not acted and why he will probably act, and act forcefully in the coming months.

First, he has always been cautious in his decisions. This issue has drawn criticism from many, because it seems as if he always wants to reach the limit, as he did with that famous phrase "we will do whatever it takes to save the euro" in 2012 he could have spoken before, saving a few months of maximum voltage, or not. I have no doubt that he acted when he was sure that all the other players involved were fully committed to save the Euro.

Secondly, he does not want Member States to relax. This has always been his obsession, and it seems as it is going to continue. In virtually all meetings he always reminds Member States that the ECB has to watch inflation, and that they cannot expect him to do what States don't do. Aggressive monetary policy which creates economic growth could relax the States, and they would stop structural reforms, given the high political cost of these reforms.

In addition, a key issue that Draghi always seems to be careful with is unanimity in decisions. And here it looks as if things have changed. If in recent months it seems that German opposition to unconventional measures was clear, now taking a look at the situation, some may argue their opposition has ceased, however, not enough. Currently there is unanimity to carry out some unconventional measures such as stop sterilizing debt operations, but this is not the case for other more ambitious measures which will likely have a greater impact in restoring credit to SMEs and families. I'm sure Draghi wants to be ambitious, as he was in the summer of 2012. Let's hope this is the case.

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