The European Central Bank is doing everything it can to balance the lack of growth across the continent with the green shoots being seen in the United States and Japan. A recovering world economy means increased demand, and increased prices across the board. Price increases are something Europe could do without in the current macro economy.
One of the most fundamental prices that the continent’s policy makers are looking to keep in check is the long term interest rate. This interest rate is particularly important for investments in capital. A new report from Patrick Artus of Natixis Research suggests that the European Central Bank may have little say in the matter.
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The biggest problem with trying to keep medium term interest rates low by manipulating short term expectations is, according to Artus, the convertibility between bonds held in Euro and those held in dollars. The ease of conversion means that despite its efforts, the European Central Bank may have little control over the interest rate.
The European Central Bank promised to keep short term interest rates low for a long time to come, a couple of weeks ago. Medium term interest rates in the Eurozone fell on that news, but they will not be able to sustain lower prices for long according to Artus.
Despite its new found role at the center of European economic affairs, the European Central Bank may have much less power than it appears to. Artus finds that the European Central Bank’s promise to keep short term rates low may only be effective in the short term, and one of the bank’s central policy tools is made almost redundant by economic reality.
Artus has also taken a certain amount of issue with the idea that a recovery in the United States will directly lead to a recovery in Europe. In another recent report, the economist took a look at the type of recovery happening in the United States. Artus found the recovery to be led by the service sector for the most part.
To Artus that meant that the United States was unlikely to import a large amount of raw materials and other goods from across the Atlantic. In his view the type of recovery in the United States could inform the ability of the European economy to recover. That report concludes that Europe’s recovery isn’t as dependent on exporting to the United States as might be thought, and the continent is capable of a recovery.
If Artus’ general stand point holds up, it seems that Europe is almost powerless in determining its own fate. If the European Central Bank can only set interest rates in a nominal manner, before the market moves in and changes them based on US recovery, and economic growth in the continent is dependent on the United States, there seems very little policy makers can do.
European Central Bank political disarray
The problem in Europe isn’t, however, the European Central Bank. There are real issues across the continent’s entire political infrastructure. Though economists and financial experts might like to boil it down to a couple of variables, European recovery relies on more than the movement of sliders in Frankfurt.
Europe is not financially impotent, it is politically chaotic. Southern European states cannot seem to keep a stable government for long enough to enact reform, and even when they can nobody seems to agree on what type of reform is needed.
Patrick Artus may be right in implying that the Eurozone has little control over its economic future. It’s not the market that’s deciding that, however, it’s the lack of European cohesion.