just after reading this latest excellent piece posted on voxeu.org:
Housing bubbles and interest rates
and by remembering one of the main problems (if not the biggest problem) of the ECB monetary policy for the eurozone the author has some additional thoughts to his earlier posting:
The problem arising from the 'just now discovered' lack of convergence of individual economies, due to a 'initial construction fault' or a lack of a closer look back then, when the EU was about to come into life, is that whenever the ECB implements monetary measures fitting the 'Neuro-countries' (or core countries) like higher base interest rate to counter inflationary tendencies ,the results will be a deflation in those 'Seuro-countries' (or eurozone periphery) and vice versa. So what is good for the one group is harmful for the other.
So instead of whining about the initial construction faults of the eurozone or countries sneaking in which never belonged in the club anyway, it is much better to concentrate on solutions to fix those problems. Just like it was not necessary to maneuver the Hubble-telescope to the space junkyard after they attached some correctional mirrors ('glasses') later.
So the ECB was designed to take measures for the whole eurozone because it was assumed that those economies would be more or less equal and just as there are many different individual problems which cannot all be tackled by 'one fits all' approach of 'austerity no matter what' it is still possible for individual member states to get 'early warning signs' from ECB and their own central banks where in their economy there are bubbles in the making and before they burst (as they usually do and usually produce some misery) they can be tackled by taxation or other means of legislation. It is conceivable that after individual member states tackled their problems, a coordinated fiscal or legislative 'fine tuning policy' besides the 'big broom' (interest rates) of the ECB is applied for all members of core and another, better fitting 'fine tuning' for the periphery.
No doubt that all of that coordinated ECB and governmental steering would be quite new* but unconventional times need unconventional measures. This is not purely 'hypothetical' since today# Mr Klaas Knot, president of DNB (Dutch central bank) called upon the Government again+ to adjust the 'hypotheekrenteaftrek' (tax deductible mortgage interest payments) in order to tackle the over indebted real estate sector. It's a bit ironic when in the past there was a tendency by governments to influence the central bank of their country now it's the independent central banks who require the governments to comply to their findings. But there is not just a coordination of monetary and fiscal policy needed as the author here suggested more than once. The so far under represented growth policy should be added to the other two at once. Coincidentally this is also one point Mr Klaas Knot was making in his earlier policy speech: The future of EMU and Netherlands' place in Europe(BIS)(pdf,eng)
If the reader has missed earlier blog entries by this author it needs to be added that growth can and should be stimulated by other measures than just fiscal stimulus. A plan for a 'modernized eurozone' should be implemented as well as coordinated export policies. For both there are some more detailed entries available already here across this blog.
# = Mar 29th 2012 Knot: Catshuis-overleg mág niet mislukken (dut)
+ = Nov 02nd 2011 DNB wil hypotheekrenteaftrek beperken (dut)
* = an assumption, feel free to comment if there are some examples to prove or to discard this thesis.
Dutch research institute CPB (@centraalpb) on Tobin tax:
"A VAT on financial services, a bank tax or a tax on financial activity would be more efficient the CPB says in a finding that was made by request of the cabinet."CPB: "Financial transaction tax not efficient"[/update]