The inefficiency of the ECB’s low interest rates policy to improve the fate of the European economy brings about very different judgements. The non-monetary nature of the interest rate could be inferred, therefore the error of the liquidity policy, so to speak, is Keynesian. However, according to other economists, the problem lies rather in the definition of liquidity. For example, Barry Eichengreen, in his recent article, captures the paradox of the situation: the central banks have certainly created an abundance of liquidity, and yet a liquidity defect itself is placing the international economy at risk. The paradox is explained according to Eichengreen, reflecting on the fact that international liquidity is made up of high-quality assets accepted, for instance, to honor the debt service by the state or used by the central banks to intervene in the markets.
A long time for a new financial stability
Like the state securities of the United States or those of Germany, or others issued by supranational organizations such as the EIB, the former have a high degree of reliability. However, by calculating the sum “we soon come to a surprising conclusion. International liquidity has plummeted from approximately 60 percent of global GDP in 2009 to today’s mere 30 percent. The change is due, in the same way, to the rating downgrades of state securities of countries that are heavily in debt, making them unappealing in international transactions”. The fact that global capital flows are falling and that global trade, after having grown faster than the global output, is also expanding more slowly could also therefore be explained by the reduction in international liquidity by effect of the downgrades following the crisis. However, if it were so, the solution would not be to make nations with a better rating issue more debt. The no-growth effect would be to weaken the rating and therefore worsen the situation of international liquidity. The return to the financial stability of governments, for instance, in the Eurozone and therefore the strengthening of their ratings, however reasonable, it is not, for that matter, a process that can occur any time soon.
The lack of reliable economic business
The issuance of quality private corporate bonds and their purchase by central banks therefore remains very delicate and would require a certain level of assurance by the governments. However, it would then fall again under the risk of weakening the rating itself in the case of crisis. Moreover, private assets issued without the support of a government could appear, on the stock exchange, secure in normal times; however, following any shock, they could become risky. Finally, considering that there is a private market of special drawing rights, created by the IMF, their further issuance would be of little use. Therefore, Eichengreen sees a practical solution in the fact that the Fund has made it possible to be able to fund its own issuances on the financial markets. Yet the need would remain for fund members to hedge against any losses. In conclusion, a solution is complicated, but the lack of reliable international business is starting to become problematic.