In summary, the ECB have been more conservative in their response.
- Interest rates fell slower
- Reluctance to engage in quantitative easing.
- Still worried about inflation despite the depth and scope of the recession.
- conservative response has kept value of Euro higher, but, this has made it more difficult for Euro exporters.
However, the IMF states that the EU area now faces one of its sharpest ever slowdowns (Output is forecast to fall 4.8% this year).
My concern is that the ECB have failed to realise how serious the threat of debt deflation and lower growth is. A genuine fear is whether the ECB have sufficient flexibility and ability to adapt to different circumstances. Unfortunately, Japan does not set a good precedent. A decade of dithering over deflation proved very costly for the economy.
The large fall in output and absence of Quantitative easing has led to a fall in M3 money supply since February. For example, Ireland is facing a huge fall in Money supply of 30%,. This is very damaging for a country indebted as Ireland. With deflation, the real value of debt increases making it more difficult to pay off.
The problem is that members of the Euro are faced with few options.
- They can't devalue to restore competitiveness (like Greece and Spain badly need)
- They can't engage in quantitative easing
- They can't cut interest rates
It is not surprising that Government debt in the Euro area has increased as governments try to provide some stimulus to their beleaguered economy.
With birth rates closes to 1.5 in Germany and Italy, and a rapidly ageing population, the future prospects for Euro fiscal deficits look grim.
Many countries are now facing public debt of close to 100%
- Italy - 116pc in 2010.
- Greece is vaulting back to 109pc,
- Belgium to 101pc,
- France to 86pc.
- Germany 82%
UK debt has soared to 55% and is forecast to keep growing by 2010. But at least in the UK, monetary policy has been able to provide some economic stimulus rather than just relying on fiscal policy.