Five to six years after the first traces of the crisis, the other G5 economies are still not firing – meaning it’s too soon to remove the policy steroids holding them up.
Central banks daren’t remove the vast tide of liquidity from QE and other stimuli hiding some still sharp rocks lurking beneath – the sharpest of which is a far from fixed eurozone.
Instead of being hyper-sensitised to an aggressive US stimulus withdrawal, financial markets should start worrying about the right things.
First, that by scraping the bottom of the policy tool box, central banks – in the US and Europe – are now overly-complicating presentation of their monetary strategies.
By dressing up forward guidance with vague economic conditions, markets may increasingly question central banks’ credibility.
In which case, if longer-term bond yields start to climb aggressively, central banks will have to do even more, not less, QE.
Second, the eurozone is not fixed. ECB president Mario Draghi’s pledge to do whatever it takes has done a great job in dealing with a symptom of the crisis – escalating funding costs.
But, he cannot alone address the problem: a monetary union lacking economic union.
This will take a decade of hard work, and any optimists expecting a quick panacea after Germany’s election this Sunday will be sorely disappointed.
