Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.
A lot is riding on the cleanup of euro zone lenders being overseen by the European Central Bank. The progress so far is encouraging. But clarity is needed on a few points to ensure that lenders really do get a good scrubbing and are therefore able to support the zone’s fragile economic recovery.
The case for looser monetary policy should be clear when the European Central Bank governing council convenes in Frankfurt on Thursday. The question is what tools to use: lower interest rates, spraying the banks with more cheap long-term money or the ECB’s first dose of “quantitative easing”. The answer should be a mixture of all three.
A big problem with the euro zone’s one-size-fits-all monetary policy is that it risks fitting nobody. That, indeed, was a key cause of the crisis. Early in the century, countries such as Spain and Ireland were booming, while Germany was in the doldrums. Setting interest rates at a level that worked well for the euro zone on average had the effect of inflating the Spanish and Irish property bubbles while pushing up wages so their economies became uncompetitive. When the bubbles burst, the damage was devastating.