In spite of the European Central Bank's recent decision to leave its monetary policy strategy in place, speculation about expanded stimulus measures remain as the region struggles to overcome lingering problems.
Although typically intended to build confidence, the latest ECB press conference failed to alleviate rising concerns that efforts to combat deflation and structural problems such as high unemployment are falling flat. Although the ECB is fighting to restore growth and inflation to the eurozone, it is quickly running out of tools amid the absence of fiscal stimulus from member states.
The fact remains that borrowing costs for the region have never been lower, making it a perfect time to implement massive fiscal stimulus in an effort to correct continuing weakness. However, strict rules governing borrowing and enduring fiscal deficits continue to hamper any form of progress.
With the threat of a global deflationary wave encroaching on European borders, the ECB has worked tirelessly by implementing a number of aggressive measures to restore growth in consumer and producer prices. Despite its efforts, results have fallen well short of expectations, considering that annualized eurozone consumer price growth remains at a disappointing 0.10%, just shy of deflationary territory.
After taking the deposit rate into negative territory, a move intended to spur businesses and consumers parking cash to spend instead of save, the results haven't been forthcoming, adding to evidence that the ECB's measures are simply not enough. The introduction of asset purchases, a more extreme strategy for warding off deflation, has also shown limited efficacy.
However, the overarching concern with respect to asset purchases is the rapidly shrinking pool of available assets.
The main takeaway from the global monetary easing environment is that quantitative easing and asset purchases generally only work when one country is pursuing the strategy. In an environment where many advanced economies are loosening monetary policy in an effort to spur borrowing and devalue the local currency to stoke export growth, not every country can be a winner.
The ECB is just one of many central banks pursuing the same policy, reducing its effectiveness. Furthermore, the ECB's ambitious asset purchase program is already running into serious problems as the availability of sovereign debt and corporate bonds rapidly declines, specifically, the German variety.
With the region's central banks unable to purchase debt that yields less than the negative 0.40% deposit rate, the supply of eligible debt could very well be exhausted unless the ECB loosens its rules.
One of the byproducts of the ECB's asset purchase program has been record-low borrowing costs for eurozone sovereigns. In the case of negative interest rates, the conditions are even more beneficial, considering that borrowers are paid periodic interest by the lenders.
However, due to the extreme borrowing restrictions put in place by the Maastricht Treaty, member nations can only run budget deficits that are below 3% without the threat of sanctions. After the sovereign-debt crisis that emerged in 2011, the singular response of governments was fiscal austerity or cost cutting to bring debt levels under control.
Despite the promise of better conditions, austerity has raised the acuteness of problems, namely unemployment which has remained above 10% region-wide for nearly five years.
Fiscal austerity has been a five-year experiment that has produced very limited results when it comes to improving debt ratios. Only last year did the aggregate debt-gross domestic product level for the eurozone begin to fall modestly.
However, the impact of austerity has been far-ranging, preventing growth and leaving governments with few tools to tackle high unemployment and low inflation. Instead, these governments should be taking advantage of record-low borrowing costs to spur economic activity, which will do more to tackle budget deficits than cutting expenditures.
Fiscal stimulus combined with looser monetary policy has historically proven to be an effective tool for regions trying to raise growth metrics, tackle deflation and eliminate structural unemployment.
In the case of the eurozone, by allowing member states to borrow more to refinance existing debt and invest in infrastructure and public-works projects, the monetary union could easily solve two problems instead of continued foot dragging when it comes to implementing necessary reforms. Although the borrowing would push nations over the treaty-imposed limit, it would put the region on a path for expanded growth, better spending and stronger investment.
However, in the sustained absence of a consensus and political unity, the polarization of member states won't contribute to a quick fix. Instead, by doing more of the same, the eurozone is hurting its own economic prospects.
This article is commentary by an independent contributor.