Economists’ roundtable on the euro zone: The ECB should stop fearing the Germans

Posted: November 3, 2014 in economy
Tags: , ,

We are hosting a round-table discussion on what the European Central Bank can do to stave off deflation and boost growth in the euro zone. First up is Paul de Grauwe of the London School of Economics. 

THE CONTRAST between the monetary policies pursued in America and the euro zone since 2012 could not be greater. Since 2012 the Fed has continued to expand its balance sheet dramatically. From 2012 to 2014 the Fed added $1 trillion to its balance sheet. In doing so, it increased the American money base (liquidity) by approximately the same amount.Exactly the opposite occurred in the euro zone. After having expanded its balance sheet during the period 2008-11, pretty much as the Fed had done, the ECB started a period of dramatic contraction in its balance sheet (and thus in the euro money base) from 2012 onwards. As a result, in 2014 the ECB had reduced the money base by €1 trillion. This was the period during which the Fed added $1 trillion to the money base, an increase of 25%.There can be little doubt that the decision of the ECB to reduce the money base by 30% at a time when the euro zone had not recovered from the sovereign-debt crisis contributed to pushing the euro zone into a deflationary dynamic, out of which it still tries to extricate itself.Why is it that monetary policies in America and the euro zone diverged so strongly? My answer is that it had much to …

via Economic Crisis http://ift.tt/1tyzX31

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