Europe’s Central Bank Needs a Little Zen
Europe is getting back in the game, and the world economy is all the better for it. The European Central Bank shouldn't spend too much time worrying about whether its actions curb the euro.
After all, the currency's 12 percent appreciation against the dollar this year reflects mostly what's going right for the euro region: Its expansion is picking up, with Germany, France and Italy reporting relatively robust increases in gross domestic product. And the region's labor markets are continuing to heal.
Inflation, while short of the ECB's target of close to but below 2 percent, is slowly gathering a bit of momentum; deflation no longer seems like an existential concern.
All this means the ECB is likely to soon begin paring back its stimulus. It should proceed and not worry overly about the euro. Be mindful of policy impact, for sure. And be humble: Remember that Frankfurt has limited ability, by itself, to influence the overall dynamics of currency markets.
The euro's gain is also the flipside of dollar weakness. This the European Central Bank can't control, nor should it try. The greenback's swoon can be attributed, in part, to fading hopes that President Donald Trump can really deliver much of what he promised, such as an infrastructure boost and tax cuts.
Dollar weakness also reflects growing skepticism at the Federal Reserve about the path of inflation in America. While the Fed isn't expected to add to this year's two rate increases until December, the more inflation recedes, the louder voices for a longer pause will become.
Why all this fuss about the euro? The ECB minutes released late last week betrayed some concern by officials that too much of a rise might become too much of a good thing. In the most immediate sense, the minutes seem designed to counter the idea that Draghi may have sounded too relaxed about the euro in recent public remarks.
To the extent that a stronger exchange rate works against inflation, some policy makers want to nip this in the bud and give prices the room needed to move toward the target.
There are different camps within the ECB about how and how fast to end quantitative easing, the program of bond buying that's kept interest rates very low. The current purchase program of 60 billion euros a month expires in December.
With Europe's recovery looking firmer by the month, it's tough to justify continuing QE at the current pace. So how might the ECB manage the exit and at the same time not add unduly to the broader forces driving the euro?
One way might be to avoid a carbon copy of the Fed's tapering program under former chairman Ben S. Bernanke. That approach reduced the amount of QE every meeting by a predictable amount until the end could be easily in sight.
Draghi could say the ECB will continue QE after December -- with a lesser amount -- and review it every so often with a stated option to expand it again should needs arise. He could also try to draw distinctions between bond buying and the benchmark interest rate, which was cut to zero last year.
Either way, the ECB needs to applaud the region's economic revival, as incomplete as it may be. That means easing back on the amount of support the expansion requires.
Draghi and his colleagues should proceed as they wish and not lose too much sleep about the euro. It's their currency, but they don't always control it.
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