The Eurozone is facing economic challenges with stagnating growth, a big output gap, and the risk of deflation. European Central Bank (ECB) accounts highlight concerns about market expectations, financial stability, and the need for continued vigilance. The ECB is cautioned against complacency and stressed the importance of patience, maintenance of a restrictive stance, and avoiding market repricing that could derail the disinflation process. Economists emphasize the need for structural reforms to help Europe recapture growth and suggest that the recent inflation spike is due to supply issues rather than demand. The Eurozone's pre-COVID deflationary equilibrium and large output gaps have contributed to the current economic challenges, with concerns about negative shocks emanating from the core economies of France and Germany. Real-time policy making challenges and the Eurozone's history of low inflation are also highlighted.
After 2008, the Euro zone went into a double-dip recession because periphery debt overhangs tightened financial conditions. What's happening now is worse, as the negative shock emanates from the core, not the periphery. Big output gaps opening in France (lhs) and Germany (rhs)... https://t.co/D4SWmc0c2U
Real-time policy making is hard, so central banks usually deserve the benefit of the doubt. But the Euro zone went into COVID with big output gaps, making it unlikely that supply shocks would morph into broad inflation. The ECB forgot the low inflation history of the Euro zone... https://t.co/kE21vnnO4E
The Euro zone was in a deflationary equilibrium pre-COVID. All its major economies had large output gaps before the pandemic, which is why the recent inflation spike is about supply, not demand. Post-COVID there are again big output gaps. The Euro zone is stuck in deflation... https://t.co/Go7Cwlkaog
ECB Concerned Market Bets On Rate Cuts Risk Derailing Disinflation - FT https://t.co/rusbbdD06c
🔴 ECB ACCOUNT: FINANCIAL STABILITY OUTLOOK REMAINED FRAGILE.
🔴 ECB ACCOUNT: MARKET REPRICING COULD DERAIL DISINFLATION PROCESS.
🔴 ECB ACCOUNT: MARKET EXPECTATIONS INCONSISTENT WITH PROJECTIONS.
🔴 ECB ACCOUNT: WE ONLY HAVE A BLURRED SIGNAL ON UNDERLYING INFLATION.
🔴 ECB ACCOUNTS SHOW NEED FOR CONTINUED VIGILANCE AND PATIENCE, MAINTENANCE OF RESTRICTIVE STANCE FOR SOME TIME
🔴 ECB ACCOUNTS: IT IS TOO EARLY TO BE CONFIDENT THAT THE TASK HAD BEEN ACCOMPLISHED.
🔴 ECB ACCOUNTS: IT WAS STRESSED THAT THERE WAS NO ROOM FOR COMPLACENCY.
🔴 ECB ACCOUNTS: CAUTION WAS WARRANTED, AS INFLATION WOULD PROBABLY PICK UP IN THE NEAR TERM.
🔴 ECB ACCOUNTS: TOO EARLY TO BE CONFIDENT THAT THE TASK HAD BEEN ACCOMPLISHED.
ICYMI, my post on the dreadful state of European bank lending. The Eurozone is staring into a recessionary abyss. The ECB needs to loosen monetary policy now. https://t.co/f3a3KeaHmL https://t.co/RaoikDKdBf
The Euro zone worked hard in COVID not to repeat the "austerity" mistake post-2008. But the end result is the same. Growth is stagnating, a big output gap is forming and deflation will come. More debt isn't the answer. Only structural reforms will help Europe recapture growth... https://t.co/8wpw3g2Rfi