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Analysts at Natixis, analyzed what actions could implement the European Central Bank if growth slows in the Eurozone. They point out that the only possible response is a more expansionary fiscal policy combined with monetisation of the additional public.

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“Because the ECB has kept interest rates at zero, the only possible policy response to a sharp growth slowdown in the euro zone would be an expansionary fiscal policy combined with the monetisation of the additional public debt (a resumption of quantitative easing) to stop long-term interest rates from rising.”

“Like Japan, in the future the euro zone may therefore see repeated episodes of fiscal deficit increases met with an expansion of the central bank’s balance sheet. The constant expansion of the Bank of Japan’s balance sheet and Japan’s zero interest rates have not led to capital flight thanks to the “financial nationalism” of the Japanese. Would this also be the case in the euro zone?”

“Financial nationalism is not as strong in the euro zone as in Japan and a lasting policy of zero interest rates and central bank balance sheet expansion could lead to a larger depreciation of the euro’s exchange rate. Significant equity and bond outflows are the norm in the euro zone.”