ECB President Mario Draghi was able to stabilize Eurozone nominal lending rates, which had been climbing dangerously in the periphery countries, with his famous do “whatever it takes” speech in July 2012. Real (inflation-adjusted) lending rates for nonfinancial businesses, however, have risen steadily since then; in Spain, they are back up to their 2009 euro-era peak, as the right-hand figure in today’s Geo-Graphic shows.
Draghi recently characterized deflation, or rather “internal devaluation,” in the crisis-hit periphery countries as “crucial adjustments vis-à-vis other euro area countries” – adjustments which “have to take place irrespective of changes in the external value of the euro,” which have been substantial (upward) over the past two years. In the same speech he said that low private lending levels in such countries were unsurprising because of “weak credit demand,” which “in the early stages of an economic recovery is not unusual.” He acknowledged, however, that “targeted measures” could be necessary “to help alleviate credit constraints” if such constraints “impair the effects of our intended monetary stance.”
We would suggest that he’s got things backwards. With inflation having fallen to 0.5% in May, it is the monetary stance itself that is constraining credit demand by pushing down inflation expectations and pushing up the real cost of credit.
Draghi should forget about “targeted measures,” and instead take broad, bold action to boost inflation expectations and tear down the wall of credit costs holding back the recovery.
Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”