Thorn in the side

- "Today’s press conference signals no change in the ECB’s stance, as the central bank scales back liquidity support at a barely perceptible pace, just enough to signal the direction of an excruciatingly slow normalization process. Overall, the ECB feels confident that a sustainable recovery is underway, both in Europe and in the global economy, but harbors no illusions as to its strength. The ECB is not losing sleep over the risk of a double-dip recession, but rather over the persistent fragility in the financial sector, underscored by the recent resurgence in market tensions. With inflation—and inflation expectations—well under control, liquidity will remain ample and rates low for quite a while. Trichet noted the uncertainty on the US outlook, acknowledging that this time around the ECB puts no faith in a possible decoupling. But it is decoupling within the eurozone which is becoming the thorn in the ECB’s side. Trichet resorted to his favorite comparison with the US to brush off concerns that the widening gap in growth rates across eurozone states might undermine the recovery or complicate ECB policy. I remained unconvinced: differences in national growth and unemployment rates pose a risk to national budgets and financial sectors that are potentially destabilizing—as confirmed by the recent resurgence in market tensions. Moreover, having witnessed bitter debates on fiscal austerity and export-led growth strategies, I shudder to think what will happen if strong growth should boost German inflation while the periphery still struggles with stagnation. And we should not forget that the one-size monetary policy contributed to boosting credit, debt and imbalances in the now embattled periphery. Diversity within such a large economy as the eurozone is indeed a fact of life, as Trichet noted, but it is also a problem that needs to be addressed more seriously."

Unicredit Market Sense 20100902

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