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41

The current unsustainable euro policy

Quantitative easing is having a diminishing

effect

The moderate pace of economic recuperation in

Europe in 2016 can by and large be attributed

to a single factor: the decision of the European

Central Bank (ECB) to continue implementing

quantitative easing (QE), a transitory policy that

cannot be extended indefinitely and has unfor-

tunately not been accompanied by any substan-

tial effort on the part of national governments

or the European Council to foster economic

growth or job creation. In consequence, the ef-

fectiveness of the euro as a single currency – a

fundamental, but not the only, element of eco-

nomic and monetary union (EMU) – has suf-

fered due to the political paralysis in which the

European Union has been locked since the out-

set of the financial crisis in the summer of 2008.

The current model of growth, imperfect and

unsustainable as it is in the medium to long

term, has produced modest results but impeded

the Union from fine tuning its macroeconomic

policy mix despite of clear signals of its limita-

tions and defects. The EU’s potential for growth

continues to decline; temporary factors other

than monetary policy that have contributed to

the recuperation such as the recent drop in en-

ergy prices in general, the price of oil in particu-

lar and an uptick in exports have been slowly

running their course while the need to stabilise

national budgets has found its way back onto

the political agenda. Implementation of the Sta-

bility and Growth Pact (SGP) will be postponed

to the latter part of 2017 due to elections taking

place in a number of European countries during

the first six months of the year. Additional geo-

political factors such as Donald Trump’s entry

into White House with an unorthodox team of

advisors and an unclear set of new policy objec-

tives and doubts as to the growth prospects of

emerging economies threaten worldwide eco-

nomic growth and raise the general level of

global uncertainty. Any surge in protectionism,

reduction in the volume of international trade or

heightening of trade tensions could neutralise

EU economic policy in 2016.

An incomplete EMU: towards

a fiscal union

José Luis Escario Díaz-Berrio and Juan Moscoso del Prado Hernández