Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

Print Print Email Email Share Share Cite Cite
Style: MLA APA Chicago Close

loading...

Mr. Draghi, Tear Down These Rates!

by Benn Steil and Dinah Walker
June 3, 2014

euro area real and nominal lending rates

ECB President Mario Draghi was able to stabilize Eurozone nominal lending rates, which had been climbing dangerously in the periphery countries, with his famous do “whatever it takes” speech in July 2012.  Real (inflation-adjusted) lending rates for nonfinancial businesses, however, have risen steadily since then; in Spain, they are back up to their 2009 euro-era peak, as the right-hand figure in today’s Geo-Graphic shows.

Draghi recently characterized deflation, or rather “internal devaluation,” in the crisis-hit periphery countries as “crucial adjustments vis-à-vis other euro area countries” – adjustments which “have to take place irrespective of changes in the external value of the euro,” which have been substantial (upward) over the past two years.  In the same speech he said that low private lending levels in such countries were unsurprising because of “weak credit demand,” which “in the early stages of an economic recovery is not unusual.” He acknowledged, however, that “targeted measures” could be necessary “to help alleviate credit constraints” if such constraints “impair the effects of our intended monetary stance.”

We would suggest that he’s got things backwards.  With inflation having fallen to 0.5% in May, it is the monetary stance itself that is constraining credit demand by pushing down inflation expectations and pushing up the real cost of credit.

Draghi should forget about “targeted measures,” and instead take broad, bold action to boost inflation expectations and tear down the wall of credit costs holding back the recovery.

Wall Street Journal: Eurozone Inflation Slows, Jobless Rate Falls
Financial Times: Eurozone Inflation Falls to 0.5%
Economist: Draghi Spells It Out
Bloomberg: Euro Inflation Slowing More Than Forecast Pressures ECB

 

Follow Benn on Twitter: @BennSteil
Follow Geo-Graphics on Twitter: @CFR_GeoGraphics

Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

Post a Comment No Comments

Post a Comment

CFR seeks to foster civil and informed discussion of foreign policy issues. Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions. All comments must abide by CFR's guidelines and will be moderated prior to posting.

* Required

Pingbacks