The
expansive monetary policy of the US Fed as well as the European Central Bank (ECB)
can only provide temporary relief, particularly for the ailing banking systems.
In the medium term, the central banks will have to retreat from this
extraordinary provision of liquidity to the markets and will have to mop up excess
liquidity to avoid inflation. There is a discussion among economists as to the
benefits and costs of those large liquidity operations. Notwithstanding the
benefits in the short- to medium term with regard to the reassurance of
financial markets and the low interest rates, there are considerable costs
which have to be taken into account.
On a global
scale, the revised risk perceptions of investors as to country risks has led to
large inflows of liquidity into emerging
markets with upward impacts on asset prices in real estate and equity markets
as well as on emerging market currencies. What the Brazilian president Dilmah
Rousseff has called a monetary tsunami
is putting severe pressure on the management capacity of central banks in
emerging economies, walking on a tightrope between shoring up growth and containing
inflation.
Furthermore, the international liquidity is clearly supporting the increase of commodity and food prices, with negative consequences for commodity importers and the poor in developing countries. An additional feature of global capital flows after the crisis has been their volatility, particularly affecting countries where economic fundamentals had not changed, but risk aversion of international, particularly European banks, has led to short-term disinvestment of capital from emerging markets for internal reasons of banks.
In Europe, the
liquidity provision to European Banks and Southern European sovereigns through
the Long-term refinancing operations (LTRO) of the ECB, as well as the financial
firewalls in the Euro-Zone (EFSF, ESM), do help to calm the markets in the
short term, but they provide only breathing space which has to be used by banks
and governments to restructure. Without bold structural reforms particularly in
Southern Europe the liquidity provision will fail
to reach its aims in the long run. There are indications, however, that weak
governments as well as weak banks will not use the breathing space as required.
Thus, the medium-term perspective for the Euro-Zone is not very positive, since
there will be no return to normal market refinancing for some banks as well as
for some sovereigns within the next 2-3 years.
For Asia all this is a clear case for gaining more resilience
with regard to global capital flows by further developing domestic and regional
financial markets. It is also a case for strengthening the intermediation of
Asian savings into domestic and global investments by an ever stronger
financial sector in Asia .
Dr. Peter Wolff
Head of Department "World Economy and Development Financing"
Leiter der Abteilung "Weltwirtschaft und Entwicklungsfinanzierung"
DEUTSCHES INSTITUT FÜR ENTWICKLUNGSPOLITIK (DIE)
German Development Institute - Institute Allemand de Développement
