Sir,
Your editorial (“Draghi perches nicely on both sides of the fence”, May 16) urging the European Central Bank to keep open its monetary spigot, might have been stronger had it recognised two important considerations.
The first is that, beyond monetary policy, an important factor contributing to the green shoots now appearing in the European economy has been the approximate halving of oil prices. However, over the past two months oil prices have rebounded by around 30 per cent from their trough at the same time that there has been a significant appreciation of the euro and a significant backing up in long-term European interest rates. This, together with potential risks from Greek and Ukrainian defaults, leaves little room for complacency about either the strength or the durability of the European economic recovery.
The second is that the European economy remains characterised by large gaps in the labour and product markets, which are not expected to close quickly. This has to heighten the risk that core European inflation might decelerate further from its already low level of 0.6 per cent, which would again raise the spectre of deflation.
With the European recovery far from secure and with inflation at barely one-third of the ECB’s target, the ECB can ill-afford too early a withdrawal from its asset buying programme.
Desmond Lachman, American Enterprise Institute, Washington, DC, US
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