Despite the fact that the European Central Bank (ECB) appears to be unable to boost the inflation rate by itself, the ECB will - as its President, Mario Draghi, promised - try anyway. Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed income in the Global Investment Center of the Private Bank of ABN AMRO, thinks that the ECB is going to use unconventional measures to accomplish this. However, the question is whether we actually want the ECB to use these kind of measures.
The ECB can not be blamed for the fact that the inflation rate is still so low in the eurozone. On the contrary; this is due to the fact that no structural reforms were implemented after the crisis. Governments are reluctant to undertake such reforms because politicians know that proposing such reforms reduces their popularity. Furthermore, they often think that if they don't take care of the country's financial problems, the ECB will.
The toolbox of the ECB is inexhaustible, the ECB can buy everything it wants to buy. But what kind of incentives will give this to the economy? The best manner to get out of a crisis is when politicians of countries in financial distress take the right actions and the ECB should only help these countries by means of supporting measures. However, the ECB should not do this for free: it should demand reforms in return. If it doesn't, countries might end up in a 'Japan sceario', a state in which the economy is in a downward trend and in which there are large productivity losses. You can only escape from such a scenario by boosting your demography or productivity.
The ultimate heroic remedy of the ECB would be helicopter money. The ECB then creates large amounts of money and distributes this money directly to the citizens instead of to governments. However, this remedy raises the question what consequences this will have for the trust in the country's monetary system. It could lead to very unexpected effects, because it has never been conducted. Even the Japanese government did not dare to condut this measure, despite the fact that inflation has been very low for already twenty years.
- Professor