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Beware of Europe’s Policy Hardening

El-Erian, Α. Μ. (2014) “Beware of Europe’s Policy Hardening“, Bloomberg View, European Economy, 10 October.


Judging from the recent remarks by European officials, policy positions are hardening once again in the euro zone. Fueled by disappointing economic performance, the risk is that the deepening difference in views in Europe will further complicate a much-needed recovery. This is regrettable because it need not be so.

Having flirted with a disorderly disintegration, the euro zone embarked on an impressive period of sustained financial normalization starting in July 2012. The immediate crisis receded as borrowing costs came down, bank deposits stabilized and lending resumed. In the process, the blame game played by member countries gave way to collective relief and more constructive dialogues.

Despite the valiant efforts of the European Central Bank, this stable period hasn’t been accompanied as yet by a strong overall economic recovery. The improved growth performance of Greece, Ireland and other peripheral countries has been offset by weaknesses in the three largest economies — Germany, France and Italy. The weakness seems to be getting worse as suggested by this week’s disappointing data on industrial production, including a much-worse-than-expected contraction of 4 percent in Germany.

Economic slippages inevitably fuel disenchantment in policy making, which, in the euro zone, excessively pushes officials to corner solutions — meaning they are unwilling to make policy compromises. As such, much of the narrative is now regressing to the old debate between austerity and growth, with the same advocates on either side. And, once again, exaggerated differences among individual governments are spilling over into the ranks of the ECB.


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