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“There needs to be a certain credibility,” opined Mario Draghi, President of the European Central Bank, as he launched outright Eurozone quantitative easing last Thursday. “Today, we’re showing that such credibility is deserved”. When used by an economist, “credibility” is indeed a very important word. But I’m afraid I take issue with Signor Draghi’s usage.

When I began studying the dismal science – some 30 years ago, I’ve just realised with anguish – central bankers gained “credibility” by implementing policies which were tough over the short-term but ultimately constructive for the longer-term health of the economy.

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European debt and equity markets ended a tumultuous week with a rally on Friday. So shares in the US and across the rest of the world rose too. But the threat of a “euroquake” – a systemic collapse which would make Lehman Brothers look tame – is by no means over. Far from it.

Europe’s leaders don’t know how to solve this crisis because they don’t know what they want. Should attempts be made to hold the eurozone together, with Greece staying in? Or should the threat to expel Athens be followed through, at the risk of causing further defections, with monetary union being reduced to a Franco-German rump? This is an enormous question, which only Germany can answer. Until an answer is forthcoming, chaos will continue to ensue.
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