Tag: Jean-Claude Trichet

Figure 1: ECB 2010 Rate Hikes Delayed Europe's Recovery for Four Years but it's Now Underway. Eurozone inflation remains extremely low, with core inflation nearly a point and a half below that of the U.S. (Figure 7). This implies that the ECB can probably wait at least 12-18 months before raising rates. On a similar note, Draghi will almost certainly bring QE to an end before leaving the ECB in October 2019. The Power of the Bond Market and the Syrizification of the Europe One major risk to our dovish forecast for the ECB would be a dramatic fiscal deterioration in Europe owing to widespread tax cuts or spending increases. Moreover, some policy normalization, such as an end to QE and to negative interest rates, might actually boost bank profits without hurting Europe's borrowers. Political concerns in Europe from Brexit to the stability of the governing coalitions of Germany, Italy and Spain are also pulling the euro lower. Europe's fiscal position continues to improve while U.S. budget deficits explode. When it comes to bonds, continued growth in the eurozone, the likelihood that Italian and German politics won't, in the end, spiral out of control, and an end to QE, could put a bearish tilt on the EU's bond markets. Bottom Line Key European countries are governed by fragile coalition governments Populist governments will likely moderate once in power European economic indicators continue to improve Many European nations are achieving a dramatic post-crisis deleveraging Public sector finances continue to improve European banks may have challenges, but bank failures are unlikely with zero rates EURUSD remains caught in a fiscal versus monetary policy tug-of-war If investors focus on Europe's growth, Eurozone fixed income could sell off to the detriment of U.S. Treasuries