Air getting thin in Frankfurt: Next week at the ECB

November 13, 2015

The supermoon is seen next to the air-traffic warning light illuminated headquarters of the European Central Bank (ECB) in Frankfurt, Germany, early morning September 28, 2015. Sky-watchers around the world were treated when the shadow of Earth cast a reddish glow on the moon, the result of rare combination of an eclipse with the closest full moon of the year. The total "supermoon" lunar eclipse, also known as a "blood moon" is one that appears bigger and brighter than usual as it reaches the point in its orbit that is closest to Earth.  REUTERS/Kai Pfaffenbach - RTX1SSIR

The higher you climb, the thinner the oxygen. As it prints more money to help the economy, the European Central Bank has climbed ever steeper. Yet prices, a barometer of economic health, are dangerously close to reversing. If that happens, and shoppers postpone big buys or companies keep a lid on wages, we could see Japan-like stagnation. To avoid that, the ECB is set to top up bond-buying.

But there are few options. One would be to buy the municipal debt of cities like Paris. (This is a $500 billion market.) Alternatives, such as corporate debt, are hard to buy. Another option is to cut the deposit rate, increasing the charge on banks for parking money at the ECB. Will this revive the economy? That’s anyone’s guess.

If the euro zone has reached a low ebb, we can take heart at least from the fact that discussion about a break-up is off the table. Staying together makes sense. No one knows that better than Baltic states like Latvia. The euro, its former finance minister told us, was as effective a shield against the Russian threat as NATO. As in the past, it is politics rather than economics that keeps the euro family together.

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