The spreading wave of influenza has revived the discussion about necessary interest rate cuts. This actually comes at the wrong time. In recent weeks, there has been increasing discussion on the capital market as to whether the ultra-expansive monetary policy of recent years is endangering financial market stability. The background to this discussion is not so much the fact that key interest rates are at zero or that the deposit rate is negative, but rather the long period of loose monetary policy.
Although monetary policy has been running at full throttle for a year now, inflation is stubbornly low, wages are hardly rising at all and investments, such as economic growth, are developing moderately at best. These developments have raised doubts about the effectiveness of monetary policy. While the interest rate cuts and bond purchases were important and correct steps to overcome the crisis, the ECB is no longer able to solve the underlying problems within the European Monetary Union. Monetary policy limits have been reached in the euro area.
Moreover, the current monetary policy stance should not underestimate the risk that market participants have become accustomed to the abundant supply of liquidity and low financing costs. The path out of low interest rates is therefore very difficult. This puts the ECB in a dilemma: on the one hand, it can hardly provide any more positive economic impulses, but on the other hand, it cannot tighten monetary policy without causing major distortions in the European economy and the structural integrity of the euro zone. Monetary policy has reached its limits.
The only way out of this dilemma is through intensive cooperation between monetary policy and structural policy. Sustainable growth must be triggered by reforms in the individual EMU countries that raise growth potential. Short-term fiscal policy programmes that do not address the structural problems in the individual EMU member states tend to be counterproductive. Monetary policy and structural policy must go hand in hand.
A simple „keep it up“ is not an option. This is where the new ECB chief, Christine Lagarde, can bring her many years of political experience to bear and, together with the euro area governments and the EU Commission, improve the conditions for growth and the structural environment. As soon as this is tackled, the ECB can also normalise its monetary policy without jeopardising the successes achieved in recent years.