ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Future of Europe’s Economic and Monetary Union

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As a result of the extraordinary and unconventional monetary policies in response to the Great Recession of 2008, the United States (US) Federal Reserve, the European Central Bank (ECB), the Bank of Japan, and the Bank of England, along with the Swiss and Swedish central banks, now hold more than $15 trillion (tn) of assetsdwarfing Middle-East sovereign wealth funds. Most of these assets are government bonds they purchased in quantitative easing operations. Today, these central banks own one dollar in every five of the $46 tn total outstanding debt owed by their governments. The ECB and Bank of Japan are still buying more. On 26 October, ECB President Mario Draghi announced a slowdown in these purchases from an annual rate of 720 billion (bn) ($828 bn) to 360 bn ($414 bn), but no date for a final exit.

Monetary support for government bond markets is not always and everywhere a bad idea. It must stop because it is no longer required. While it was the right idea at a specific moment in time, it is a generally dangerous idea. From the vantage point of the financial crisis, the absolute prohibitions of the original European Union (EU) Treaties appear to be an indulgence of theory over practice, but the architects of the EU Treaty were right to make it hard for governments to monetise their deficits, however indirectly. The more monetary support for the bond markets persist when it is no longer required, the more dangerous it will become: capital will be misallocated. When rates are lower than they should be, the risk is that productive investment will give way to excessive financialisation. Watch the return of the corporatefinancier while real investment and productivity remains downbeat.

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Published On : 20th Jan, 2024

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