20180724-NATIXIS-The_next_president_of_the_ECB_will_not_have_an_easy_job_5页_633kb

Flash Economics Summary

Core Content

The document outlines the challenges that the next president of the European Central Bank (ECB) will face in late 2019, focusing on the limitations of monetary policy and the risks associated with fiscal policies in the euro zone. It highlights the structural issues within the euro zone that could lead to economic instability and the ECB's potential role in mitigating or exacerbating these issues.

Main Points

1. Absence of Monetary Policy Leeway

• Current Plan: The ECB is planning to raise interest rates after the summer of 2019.
• Economic Context: Euro-zone growth is slowing due to recruitment difficulties and rising inflation, which reduces real wages.
• Challenge for New President: By late 2019, the new president may inherit weaker growth and still low interest rates, limiting the ability to use monetary policy to stimulate the economy.

2. Need to Monetise Fiscal Deficits

• Fiscal Response to Slowdown: If growth declines, governments will likely adopt expansionary fiscal policies.
• High Public Debt Levels: Public debt in the euro zone (excluding Germany) is already very high, making it difficult for peripheral countries to finance additional deficits.
• ECB's Role: The ECB may be forced to monetise these fiscal deficits, potentially restarting quantitative easing (QE) measures.

3. Risk of Public Debt Crises

• Lack of Risk Mutualisation: There is no mechanism for mutualising risks among euro-zone countries, such as a common budget or eurobonds.
• Political Risks: The rise of nationalist or populist governments could lead to abnormal fiscal expansion or political tensions with the EU.
• Investor Fear: Such developments may cause investors to fear a break-up of the euro.
• ECB's Dilemma: The ECB will face a difficult choice between supporting countries at risk of debt crisis (which could lead to moral hazard) or not supporting them (which could threaten the euro's stability).

Key Information

• Euro-zone Growth: Expected to slow, with charts illustrating PMI, recruitment difficulties, and inflation trends.
• Monetary Policy Constraints: The ECB's interest rate policy is no longer countercyclical, limiting its ability to respond to economic downturns.
• Fiscal Policy Risks: The potential for increased fiscal deficits and the ECB's role in financing them could lead to a return to QE.
• Political and Economic Instability: The risk of public debt crises is heightened by the lack of a unified fiscal framework and the potential for divergent policies.
• ECB's Challenges: The new president will need to manage these risks while maintaining the euro zone's economic cohesion.

Conclusion

The next ECB president will inherit a complex and challenging economic environment characterised by:

• A lack of monetary policy flexibility;
• The possibility of monetising fiscal deficits and restarting QE;
• The risk of public debt crises due to political and economic divergence among euro-zone members.

These factors will require careful management to avoid destabilising the euro zone's monetary and fiscal systems.

Disclaimer Highlights

• The document is intended for professional and qualified investors only.
• It is confidential and cannot be shared without consent.
• It is not a personalized investment recommendation and does not constitute a financial analysis.
• No liability is accepted for the information provided.
• The views expressed are those of the authors and do not necessarily reflect the views of Natixis or its affiliates.