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In short, monetary policy is perpetuating the disequilibrium between creditor and debtor economies in the eurozone, and macroprudential policy is doing nothing to stop it. When interest rates normalize, this could generate serious financial instability. But andndash and this is the conundrum andndash the ECB has few options for stimulating demand among the eurozoneandrsquos more solvent agents, and thus supporting a sustainable recovery.
In deciding its next move andndash whether to initiate more bond purchases, lower interest rates even further, or do both andndash the ECB must recognize that any positive impact on demand probably will be limited to the eurozoneandrsquos weaker economies andndash that is, the economies that can least afford it. This is a high-risk move, one that is probably not justified by the effort to bring price increases a few dozen basis points closer to the ECBandrsquos target.
A recovery has already begun in the eurozone. It should be left to run its course. An even more expansionary monetary-policy stance might strengthen the recovery marginally, but at the cost of increasing the eurozoneandrsquos already-dangerous imbalances.
hr Daniel Gros is Director of the Center for European Policy Studies.
Copyright: Project Syndicate, 2015.


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