Mario Draghi will most likely announce, for September, measures for a more accommodating monetary policy. A possible rate cut and the resumption of QE would lead to an increase in financial repression. Debt issuers will benefit to the detriment of the savers. This will give additional margins to euro area governments since they will be even less constrained by any financial element.
Four questions
1- Will household behavior be affected? The drain on their savings will only be gradual via the decline in bond yields (I am thinking here of life insurance for example). Do not count on an acceleration of consumption. This has already occurred when the refi rate has fallen to 0%.
2- The rate on corporate bonds will remain very low especially if the QE includes purchases of companies’ securities. The risk is to have more fragile financial structures because the debt will not stop.
3- The financial repression favors governments which appropriates an additional part of the savings. The question is: what for? If it is to finance operating expenses then the efficiency will be zero and the monetary measure will only increase the discomfort. This means that expenditures must be on capital expenditures to expect the convergence to a higher growth trajectory. In this case, monetary policy will have been effective. This brings back Olivier Blanchard and Martin Uribe’s discussions.
4- These questions bring us once again to fiscal policy and its effectiveness. Draghi discusses this issue at each press conference. Eurozone fiscal policy will not exist for lack of support and not just from Germans.
This means that to be effective the measures announced by the ECB will have to reflect a strong fiscal awareness of all the countries in the zone. One can be dubious unless Germany enters a recession. In this case the purse strings would relax.