Euro zone

Unemployment falls, but remains the problem in Euroland

In the European Monetary Union (EMU) unemployment has been falling since Q2 2013. The rate has been gradually reduced from over 12 percent to at present 10.2 percent. A large proportion of the new jobs created can probably be attributed to the moderate economic recovery. However, it has not yet become strong enough to drive the rate down to levels prior to the crisis. For this reason, there has only been a very slow decline in the unemployment rate. The turgid unemployment in many EMU member states is also a reflection of a lack of structural reforms. Some of the Eurozone economies have in the recent past introduced structural reforms to their labour markets. On balance, the indicators on labour market flexibility show that deregulation of termination and recruitment regulations has increased the scope in the labour markets of the individual EMU member states. And in response to the severe…

Negative key interest rates: A monetary game of dice

In the aftermath of the financial crisis, an ever increasing number of experiments were carried out to make monetary policy more expansionary. Negative key interest rates are the latest beacon of hope. More and more central banks are introducing negative interest rates to promote lending and thereby inject life into the economy and nudge up inflation. But now a serious economic debate has flared up between central bank representatives and international economic thinktanks over whether these goals can actually be achieved. Over the long term, negative key interest rates involve many risks of producing the exact opposite of what central bankers hope to achieve. 1.) Private households are hoarding cash Negative interest rates are not being passed on to private households anywhere in the world at present. Yet, the longer the era of negative interest rates persists, the greater the pressure to do precisely this. The danger exists of cash…

Eurozone likely to face problems after end of ECB purchase programme

The interim conclusion on the PSPP around 14 months after the start of the programme is mixed. Contrary to what had been feared, the ECB has so far always managed to meet its purchase target in full. In spite of its technical success, however, the ECB has not yet met all the aims inherent to the programme. Although lending in the eurozone has risen sharply, inflation is still close to or even below 0%. Medium-term inflation expectations, which are mainly influenced by the trend in the crude oil price, are in fact below the level at the beginning of the PSPP. This was one of the main reasons behind the ECB’s decision to increase the programme volume substantially in March of this year. In contrast, the market-related consequences of PSPP are considerable. Both yields and spreads have fallen sharply in the meantime, while the volatility of bonds has increased. Moreover,…

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