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Financial Markets & Risks - Essay Example

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Financial Markets & Risks

And at last let's provide an explanation of the actions the ECB might take if the rumours of liquidity problems in other institutions prove to be correct.
Over the last few years, the euro area has witnessed a gradual recovery in economic activity. The recovery started in the second half of 2003 and has now led to ongoing trend growth rates that seem to be close to our present estimates of the potential growth rate of the euro area economy.
Several factors are behind the relatively gradual pace of this recovery, including oil price increases, the restructuring and reshaping of the productive sector triggered by global competition, and a possible decline in potential output growth.
First, taking a longer-term perspective, there is some evidence that, underlying the moderate growth rates over the last few years, there may have been a decline in trend potential output growth in the euro area, particularly when comparisons are drawn with most of the 1980s and 1990s. The trend potential output growth rate seems to have moved closer to the lower bound of the previously estimated range of 2.0-2.5%. The sustained decline in euro area labour productivity growth has been identified as the main factor explaining lower potential output growth. Euro area labour productivity growth (measured per hour worked) was 2.4% in the euro area from 1981 to 1990. However, during the period 1996-2004, productivity fell to 1.3%. Decomposing trend labour productivity growth, in turn, shows that this decline reflects both lower growths in total factor productivity and less capital deepening.
There is a wide consensus that the still significant structural rigidities in the euro area factor and product markets are likely to explain the lacklustre evolution in these components of potential output growth and, consequently, the relatively modest euro area growth rates in the recent past. While there is some evidence that euro area product and labour markets may have become somewhat more flexible over time, there is also a wide consensus that further structural reforms are needed to improve euro area labour productivity growth relative to other economic areas. In this context, expert groups have put a number of specific European policy initiatives and recommendations to promote productivity growth in the euro area forward.
After the second ECB rate hike, the monetary policy was repeated to be still accommodating. At what level do interest rates become neutral, i.e. when they neither stimulate nor brake economic activity.
When Jean-Claude Trichet, President of the European Central Bank reported on the decision of the ECB's Governing Council to raise the interest rates he said that ECB decision reflected their clear assessment at that time. They did not decide ex ante a series of monthly increases of rates as has ...Show more


The European Central Bank (ECB) provides the control of monetary policy in the eurozone. At present, the inflation rate in the eurozone is slightly below target. From comments that have come from various spokespeople at the ECB over the last 2 months, we are aware that the central bank's monetary officials generally happy with the present course of inflation but do have concerns about some economic data that has recently been released, and by developments in the eurozone financial markets.
Author : isaiahschmeler
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