Will the quantitative easing of the European Central Bank continue at the same pace in Europe?
This is at the center of a Financial Times opinion piece by Antonio Garcia Pascual, chief European economist at Barclays.
Although there seems to be some economic recovery occurring in the European Union, the pace of the recovery remains slow, and inflation is modest, at best. Similar quantitative easing (QE) seems likely, although there has been talk about the ECB tapering its purchases of securities to end the massive acquisitions that have been occurring to boost the economy. That may not be the best thing for European economies that need more fundamental changes to spur meaningful growth.
Pascual argues that quantitative easing has been successful in that economic growth has been faster than it would have been without the quantitative easing, and inflation, although it is only .9% per year, would have been lower.
Even if quantitative easing extends for another year or so, Pascual argues that inflation will only be up to 1% in 2017 and below 1.5% in the next year.
He states "we would see reducing monthly QE purchases to zero in 2018 as a mistake. QE will be needed in 2018 but at a reduced pace, as activity gradually improves."
So, in effect, the monetary policy of the ECB has saved Europe, but it will still be needed to keep the European Union on a respirator. Quantitative easing will not fully revive the European Union, but it may allow the EU to survive.
What is needed to revive the community is what the populist movement within the EU is fighting against: structural reform of the economy.
There are two major factors of the necessary reforms that are being opposed, according to Pascual. First, there is the public debt problem that has gotten out of hand and which requires more fiscal prudence.
In the past couple of years, governments have taking advantage of the low interest rates and have made things worse for themselves in terms of managing their debt positions.
Germany, of course, does not have this problem, but the situation is dire in France, Italy and Spain.
For example, in Italy, public debt is more than 132% of gross domestic product. Without the generosity of the European Central Bank, the burden might approach 150%.
There needs to be structural reform of fiscal operations moving in the direction of a consolidated EU budget based on "prudent" principles.
The populist" mindset, however, is against big reforms, except those that protect local jobs short-term.
The second factor has to do with reforms to the supply-side of the economy. Countries must restructure their labor practices, their bureaucracies, their welfare programs, their educational systems and more. The emphasis must be on improving the growth of labor productivity.
But these reforms" are anathema to the current populist way of thinking.
"Clearly, monetary policy cannot boost long-term productivity and growth; it can only buy the time needed for governments to implement fiscal and supply-side reforms," Pascual writes.
If Europe does not move in this direction "Europe could be 'trapped' in the self-feeding dynamics of over-loose fiscal policy, no reforms, low growth, high debt and the need for perpetual QE to prevent a sovereign crisis," he writes.
However, a perpetual QE will not prevent "a sovereign crisis."
Governmental actions to pump up aggregate demand and achieve higher employment rates has led to bloated bureaucracies, overly restrictive laws and regulations and legacy labor unions.
At their core, this has been done to keep workers in jobs they have held for all or most of their careers, and the policy is not to society's benefit.
Yet this is where voters in Great Britain, the United States, Italy, and with elections coming up this year in Germany and France, seem to be taking us.
Is this direction in our long run interest?