Straight from the Specialists
(Any opinions expressed here are those of the author and not of Thomson Reuters)
We live in stirring times. The president of the European Central Bank, Mario Draghi, crossed the monetary policy Rubicon and cut one of the euro area’s key interest rates into negative territory. This is dramatic stuff, as even the most economically oblivious are likely to recognise that negative interest rates are a radical policy.
At the same time, the United States Federal Reserve is gracefully gliding out of its quantitative policy position – and by October that money printing process is likely to be effectively at an end. The question from most investors is therefore “what next for U.S. monetary policy?”.
The answer is likely to be an increase in U.S. interest rates, and those increases may start earlier and take place faster than many investors currently assume. The Bank of England has been even more explicit in signalling a desire to tighten interest rates sooner than financial investors had expected.
Euro area monetary policy and Anglo-Saxon monetary policy are taking different directions – radically so. It has been a decade since the Federal Reserve last embarked on a tightening cycle, and euro area rates have never gone negative before. The bias in discussions is whether the Fed and the ECB both do more than is currently expected; the difference is that “more” for the Fed means “more tightening”, while “more” for the ECB means “more policy accommodation”. With the expectations and the reality of the direction of interest rates diverging in this manner the instinct of most in financial markets is to assume that the euro will weaken against the dollar.
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The Euro should not exist. In a perfect world (run by economists) the Euro would never have been created. Sadly, however, the world is not perfect — and it is run by politicians. The result is an entirely dysfunctional monetary union.
(Paul Donovan is a Managing Director and Global Economist at UBS. The views expressed in this column are the author’s own and do not represent those of Reuters)
The euro should not exist. More precisely, the euro should not exist in its current form, with its current membership.