Now is not the time for more incentives from the European Central Bank (ECB), according to the Citigroup Chief Economist Willem Buiter. He recalled that the ECB decided to leave unchanged the base interest rate at the last meeting in Frankfurt last month. But the bank, however, extended the program of quantitative easing until at least September 2018, but to shrink the volume of assets purchased by the beginning of next year.
In his words, the big topic in 2018 will probably be how the world will face the ongoing expansion of the markets.
“Central banks have bought bonds to cut long-term interest rates, but it’s not clear how long the Japanese will continue to buy. Americans, and soon Europeans will realize that the economy is finally well enough to get out of potential turbulence and without help”, said he. Citigroup’s chief economist, however, specified that the road to Europe is difficult. According to him, the main reason is that the parties do not “coordinate” their budgets and the reserves they set aside.
According to Willem Buiter, the healthy growth places the world in a better position to cope with a further downturn that will inevitably occur at the end of the economic cycle. He specified that advanced economies are at different levels of the cycle and take different steps. According to him, next year we will witness serious capital movements.
“Governments are struggling with recessions by lowering interest rates, cutting taxes and increasing costs. However, these instruments are lurking if interest rates are already low and government debt is so high that governments can not get out of budget deficits”, explained the Citigroup Chief Economist.
Willem Buiter also said that when the fiscal price starts to rise, policy options in the Eurozone are very limited. In this situation, “the good news is actually bad”, added he.
According to Citigroup experts, a key issue for 2018 is how businesses and governments will respond to some rather terrible geopolitical threats that have so far been “atypical”. The best example is South Korea, which has been shaken by threats of a nuclear attack from the north, corporate scandals, and even a warning from President Donald Trump that his free trade agreement with the United States may not survive.
At the same time, Britain’s economy has shrank much less than expected, given the uncertainty about the country’s exit from the European Union, the expert said. This is all the more remarkable given the way that Prime Minister Teresa May’s government holds the talks with Brussels. Because of the crisis in Catalonia, Spain may lose one fifth of its economy. The Spanish government will be subjected to a serious test in the coming months. We also have to recognize that a number of European countries also have their own separatist movements, Citigroup’s chief economist said.
According to him, one of the big questions in 2018 will be the way the EU responds in the context of Brexit, the crisis in Catalonia and the different European visions of French President Emanuel Macron and German Chancellor Angela Merkel. Still, Macron wants more fiscal integration that he does not like about the Germans. In his words, the risk is not negligible, as there is a serious gap between economic ideas and political stability.
The effect of the crisis in Catalonia will be like that of Brexit on other economies.
In the short term, the biggest risk in the coming months comes from Italy, as there is no certainty as to who will govern the country.