Why Does the ECB Need to Ease?
1. Recession deeper than expected – Though the ECB slashed its 2009 GDP forecast to -2.7% at its March meeting, many analysts are expecting an even deeper contraction in 2009. Production has fallen off a cliff. Unemployment is rising, reaching double digits in Spain (14.8% in January) and 7.9% in Germany in February – higher than the UK’s 6.5% jobless rate. Domestic demand is faltering as the household saving rate (13.7% at the start of 2008) climbs further on job insecurity and portfolio losses. 2. Strong euro could nip export recovery in the bud – The euro has strengthened against its key trade partners, especially where quantitative easing precipitated a currency selloff – i.e., US, Switzerland, UK and Japan. A strong real effective exchange rate could make an export recovery much more difficult in the face of weak external demand. BNP Paribas estimated the rise in the euro’s REER this year has been equivalent to a 50bp rate hike. 3. Inflation threatens to dip into negative territor
