Will Fed-ECB policy divergence affect Eurozone recovery?

How will the monetary policy divergence between the US Federal Reserve and the European Central Bank affect the Eurozone economy?

Below are some responses from various economists:

Alberto Gallo, RBS
The currency channel is positive for the Eurozone. But as the US begins its hiking cycle, emerging markets economies which have built up a lot of $-denominated private sector debt are vulnerable to capital outflows. This could increase global financial market volatility, which could spillover to the Eurozone. The EM weaknesses could be one factor to slow down the US hiking path, or even lead to a policy reversal.

Anatoli Annenkov, Société Générale
It should benefit a weaker euro and exports, but rising interest rates in the US are also likely to lead to some unwarranted tightening in the ECB’s monetary policy stance. As the expected divergence mainly reflects robust and improving economic conditions in the US, it should on balance be positive for the euro area.

Chris Williamson, Markit
The euro will continue to weaken, boosting exports and pushing up inflation slightly. The big uncertainty, however, is whether higher US interest rates cause knock-on effects such as a corporate bond or emerging market crisis, which would clearly have a material impact on eurozone and global economies.

Clemens Fuest, Centre for European Economic Research Mannheim
The divergence will keep the Euro exchange rate at a low level relative to the dollar and facilitate net exports. But to a large extent the divergence is already reflected in the exchange rate.

Alastair Winter, Daniel Stewart & Co
Not sure divergence will last unless ECB really does get trapped into monetising EZ members’ sovereign debt, which will cause political uproar. FOMC unlikely to raise rates much and may even reverse in any new crisis (which surely has to come in next 3-5 years). Buba and other Northerners will try to limit new ECB measures.

Carsten Brzeski, ING-DiBa
Through unprecedented volatility.

Anonymous Economist
The main channel will be the exchange rate. The effect, however, will depend on the speed of adjustment in the US, the policy of the ECB and on the anticipation of both effects by the markets. Furthermore, the resulting boost from a (potential) further depreciation on trade and growth will differ significantly among EZ economies. Yet, overall the boost will be positive.

The post Will Fed-ECB policy divergence affect Eurozone recovery? appeared first on FXTM Blog.

Source:: Will Fed-ECB policy divergence affect Eurozone recovery?