When the Fed slowly but surely scaled back monetary stimulus in 2014 by ending bond purchases, the US economy was in the third year of an economic upturn. The robustness of the economic recovery at that time, and the revival in the labour market, were undoubtedly important factors in prompting the US central bank to fire the starting shot for a less expansionary monetary policy, without risking a slip back into recession. Four years later, the European central bank seems to have reached a similar stage and looks set to announce a reduction in bond purchases at the forthcoming Monetary Policy Council meeting. Monetary stimulus is then likely to be reined in at the beginning of next year. This will also pave the way for European monetary policy to be normalised over several years. However, does the economic performance of the Eurozone also justify scaling back ultra-loose monetary policy?
To answer this question, we have compared various economic indicators such as economic growth, the employment situation, inflation and debt levels in the Eurozone with those in the United States. We have focused here on the time when the Fed began to slowly reduce monetary stimulus. We have established that a number of Eurozone indicators are currently at similar levels to the United States in 2013. The time is therefore propitious for scaling back the volume of ECB bond purchases – particularly since none of the monetary measures implemented by the Fed has had a seriously negative impact on the financial markets.
Comparing the Eurozone with the United States thus shows that, based on the robust economic situation and the decline in unemployment, a less expansionary monetary policy would also be appropriate over here. Conversely, US inflation rates which were too low did not prevent the US central bank from starting to reverse monetary policy at that time. The ECB is also therefore unlikely to be deterred from reducing bond purchases despite only very moderate price pressure – particularly since the purchase programme has in principle almost reached its operating limits. If the Fed is used as a blueprint for the ECB, European central bankers are likely to conclude bond purchases next year and initiate a turnaround in interest rates in 2019. One reason why the ECB will probably act more slowly than the Fed is that, in economic terms, the Euro area is much more heterogeneous than the United States.