Radical action needed as euro zone remains on amber alert

To get economy moving again, policymakers should go ahead with quantitative easing to boost liquidity and allow the euro to weaken

The euro zone’s “softly, softly” approach to the financial crisis is not working. The economy is sinking into deflation, dragged down by a zombie banking system and spiralling government debt. It is slipping back towards recession. A future break-up of the euro zone remains a potent threat.

Policymakers can ill afford to keep kicking the can down the road. The bailout earlier this month of Portuguese lender Banco Espirito Santo was a sharp reminder to investors the euro zone was not out of the woods by a long stretch.

The root causes of the crisis have not been tackled. High unemployment, chronic underinvestment, poor productivity and falling competitiveness continue to hamper recovery. Banks saddled with toxic loans and tightening capital requirements are starving the economy of much-needed finance. Governments battling burgeoning budgets with tough austerity policies pose a drag on growth.

Radical action is required. The European Central Bank has tinkered far too long over quantitative easing – buying bonds and pumping cash back into the markets. In the past five years, it has missed a vital window of opportunity to bring the economy back to strength.

The United States and Britain both bit the bullet early on with quantitative easing and zero interest rates, fast-tracking their economies to quicker recovery. The benefits are clear to see.

By comparison, the euro zone is struggling with 0.9 per cent growth. Some economies like Italy have already slipped into recession. Even Germany’s economy has lost drive. Fallout from the crisis in Ukraine and the European Union’s sanctions against Russia are gnawing on economic confidence, spending plans and investment intentions. Recession could be on the cards for Germany by the third quarter.

Full article: Radical action needed as euro zone remains on amber alert (South China Morning Post)

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