WES Exclusive: Chief Executive of the European Policy Centre on ECB’s decision to end its €2.6 trillion crisis-era QE

Fabian Zuleeg, the Chief Executive of the European Policy Centre calls for structural economic reforms to combat slow eurozone growth.

In line with market expectations, the European Central Bank (ECB) finally switched off its money-printing machine, joining the Federal Reserves and the Bank of England in the gradual exit from crisis-era stimulus programmes. ECB’s President, Mario Draghi, announced last Thursday that it called time on its €2.6 trillion bond-buying scheme, commonly known as Quantitative Easing (QE).

An unconventional monetary strategy, QE aims to boost spending and inflation by creating electronic money, then pumping it into the economy by purchasing assets such as government bonds. The €2.6 trillion purchase of government bonds lowered their yields, which are crucial factors influencing the general level of long-term interest rates charged in the economy. Successful QE, therefore, eased borrowing constraints on households and firms and provided cheaper financing to governments running large deficits to stimulate their economies.

While QE managed to avert the worst consequences of the crisis, it has not been fully capable of promoting strong medium-term growth. This is reflected in the current economic situation, with the Eurozone growth being unexpectedly weak throughout 2018. The European Purchasing Managers’ Index (PMI) – which records the trend of orders and thus of demand conditions in the Eurozone – is expected to hit this month the worst level since November 2014, as both manufacturing and service sectors slow down.

In response to fears for an underwhelmingly short and weak recovery, and now that any extension of QE is ruled out by the ECB, what other alternatives are there to mitigate concerns over the dwindling health of the Eurozone economy? For that, Warwick Economic Summit turned to Fabian Zuleeg, Chief Economist and Chief Executive of the European Policy Centre, for his thoughts on the question.

“Whatever the current state of the Eurozone economy, monetary policy should not replace long-term structural reforms that can address the underlying real economic challenges”. For Zuleeg, support for innovation, cutting harmful subsidies, fiscal consolidation, labour market reforms, external economic policies should lead to higher growth potential.

“QE was and probably still is necessary, albeit at a lower level, but it does not replace actions that can increase sustainable growth and jobs,” Zuleeg told WES in a recent interview.

Zuleeg views that the phasing out of QE should be context-dependent: “[…] the key question is whether the current weaker data is a blip or a longer-term trend”, thus warning that, if the economy continuously slows down, the ECB should be ready to change the plan. All central banks should not view extraordinary measures such as QE as a one-off tool, never to be used again. As the prospect of a new downturn becomes more realistic, unconventional monetary policies might be called into action again soon.

Christopher Lim

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