Tags: Zoellick | Monetary | Policy | europe

Former World Bank Chief Zoellick: Monetary Policy Won’t Save Europe

Monday, 30 Jul 2012 09:34 AM

The European Central Bank (ECB) will meet this week to address interest rates and ways to improve the economy, but monetary policy tools won’t save Europe, says Robert Zoellick, former head of the World Bank.

ECB President Mario Draghi has said he’s prepared to do whatever it takes to defend the euro, including cutting interest rates and making low-cost loans available to banks, the latter tool known as a long-term refinancing operation that aims to spur lending.

Bond yields have soared to over 7.7 percent in Spanish government debt auctions recently, well above a 7 percent threshold deemed unsustainable by the markets, suggesting that investors feel the country needs a bail out.

Calls for ECB action are growing.

Still, Zoellick says, structural reforms are needed that pay down debts while fostering as much growth as possible.

“Monetary policy fundamentally buys time. It doesn’t deal with the fundamentals,” Zoellick tells CNBC.

“They have to make reforms. The Germans are right, they (Spain and Italy) have to fix their fiscal situation, but also structural reforms for competitiveness,” he adds.

Other proposals aiming to keep financing available for debt-ridden southern European countries include making more rescue funding available from the continent’s bailout fund, the European Stability Mechanism, as well as the issue of a single bond backed by all eurozone nations, known widely as a Euro Bond.

Germany has resisted the idea of participating in a single bond issue on the notion that it would be asking its taxpayers to shoulder debt burdens of other countries and raise interest rates at home.

The United States, meanwhile, is in little position to help, as it is facing a sharp fiscal adjustment at home.

At the end of the year, tax breaks are scheduled to expire while automatic cuts to fiscal spending kick in, a combination known as the fiscal cliff, which could send the country back into recession in 2013.

“The tendency is to kick the can down the path and maintain the status quo through inaction. That won’t work this time,” Zoellick says regarding the looming fiscal cliff.

“There’s over a trillion dollars in spending cuts that will be made in defense and non-defense unless you act,” he explains.

The European debt crisis has seriously hampered business for many global companies, including those based in the United States and elsewhere, such as in Brazil and China.

“The new reality is that this world is not in a normal growth mode,” Dow Chemical Chief Executive Officer Andrew Liveris said recently, according to The Associated Press.

“And it does not appear that we will see this for at least 12 to 24 months,” he noted.

Other CEOs have voiced similar concerns.

“The steady drumbeat of negative news emanating out of Europe is certainly having an impact,” Royal Caribbean CEO Richard Fain said, the AP reported.

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Monday, 30 Jul 2012 09:34 AM
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