The year 2017 is just around the corner and it seems that more troubles are brewing for the Eurozone. The region faces a deadly combination of a premature ECB taper, Fed tightening and more political uncertainty. Together, those factors could disrupt the already fragile Eurozone recovery.
ECB Tapers While Fed Tightens
Mario Draghi, the ECB President, so far has proved (and more than once) his ability to stabilize the Eurozone economy and delicately navigate monetary policy. But, in the latest ECB rate decision, which was also the last for 2016, Mario Draghi may have slipped up and acted a bit too hastily. Draghi declared that the ECB would reduce its monthly bond purchases from the current pace of €80 billion a month to €60 billion, beginning in April 2017. Despite constant denials from the ECB, there is simply no other way to interpret Draghi’s declaration but as a tapering of the ECB’s Quantitative Easing program. And, in the world of monetary policy, especially ultra-loose monetary policy, less stimulus equals tightening.
The ECB is effectively rolling back part of the brakes it has used to curb volatility in the Eurozone debt market. When the Greek crisis loomed, the ECB used QE to curb volatility. Likewise, when the Spanish banking crisis erupted and, as of late, with Brexit and the Italian banking crises, the ECB quickly responded. The ECB’s massive QE program helped restrain the shocks to the system. Continue reading "Eurozone: 2017 Spells More Trouble"