Delays and half measures

The euro area member states gave up monetary policies for countering economic adversities, but the founding fathers lacked political will to compensate with pooled resources for helping each other. This incompleteness is surely made worse by wrong-headed policies, delays, and half measures. That said, the distinction is overstated: the incomplete monetary union and repeated policy errors likely come from the same source.Recent research shows the ECB fell behind the curve at critical junctures of the crisis. As the U.S. Federal Reserve slashed interest rates to fight the Great Recession, the ECB at first raised the policy interest rate in July 2008. That hike came just as euro area industrial production began a prolonged economic contraction. In April and July 2011, the ECB raised interest rates when the American rate was near zero and the Fed was adding stimulus through quantitative easing.Aside from the Outright Monetary Transactions promise in July 2012 to bail out countries in distress, the ECB has been unable to inspire confidence. Since late-2013, it has reacted to rather than led the fight against deflationary tendencies. ECB President Draghi has made an art of coyly promising more measures “if needed,” or if low inflation is “prolonged,” or “too prolonged.” While such ambiguity often serves central bankers well, markets have regarded actions taken as “too little, too late.” Earlier this month, the ECB announced new measures hoping to spur economic activity and inflation. But the criticism was swift. Stock markets “tumbled, said the Wall Street Journal, “because the European Central Bank served up a package of stimulus measures that fell well short of many investors’ expectations.” Abnormally low inflation has persisted, and the ECB’s credibility continues to be damaged.

http://bruegel.org/2016/01/delays-and-half-measures/