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2017-10-26 00:46:02
As European Central Bank Eases Emergency Measures, Risks May Lurk

FRANKFURT — The European Central Bank appeared ready on Thursday to begin dismantling a decade’s worth of emergency measures that helped keep the eurozone from disintegrating during the financial crisis.

The bank’s action, widely expected to come after a meeting of its Governing Council, highlights the eurozone economy’s astonishing renaissance. But it could also expose weaknesses across the region — and perhaps even provoke a new bout of economic discord.

That is the difficulty the central bank faces. No one knows for sure what unpleasant surprises may lurk when it begins the process of so-called tapering — taking away the easy money that made it possible for banks to lend and governments to borrow even after investors had largely deserted them during the worst of the downturn.

As a first step, the central bank’s Governing Council has signaled it will provide a timetable on Thursday for its rolling back of purchases of government and corporate debt, a form of virtual money-printing known as quantitative easing. Since early 2015, the bank has used newly created money to buy bonds and other assets worth more than 2 trillion euros, or about $2.35 trillion — a sum roughly equal to the annual economic output of India.

As that tide of cash recedes, the hazards that lurked below the surface will come into view. The list is long. For one, Italian banks are still laden with bad loans. Italy’s public debt is so high that the country spends 4 percent of its gross domestic product just paying interest.

Elsewhere, real estate prices in German cities like Frankfurt have risen so much that there is fear of a bubble. Stock prices are at historical highs and may be overdue for a correction. And Britain’s impending exit from the European Union will disrupt the economic order.

Consumers, businesses and politicians have gotten accustomed to — some would say spoiled by — low interest rates.

The central bank’s benchmark interest rate is zero, and investors are so desperate for safe places to put their money that corporations like Daimler, the German automotive giant, have been able to issue bonds that pay no interest.

Low interest rates have also weakened the euro against the dollar and other currencies, a boon for exporters whose products are usually cheaper for foreign customers as a result. The euro will most likely rise as monetary policy returns to normal.

The eurozone economy is humming, but that may be no insurance against another crisis. Such events have occurred regularly since the world’s economic powers abandoned fixed exchange rates in 1973, a recent report by analysts at Deutsche Bank pointed out.

“It would therefore take a huge leap of faith to say that crises won’t continue to be a regular feature of the current financial system,” said the report, which listed the withdrawal of central bank support as one factor that could trigger the next meltdown.

To avoid provoking renewed turmoil, the European Central Bank is expected to move cautiously.

Analysts believe the bank will cut its debt purchases by half, to €30 billion a month, starting in January. But Mario Draghi, the central bank’s president, is expected to stress that the Governing Council will stand ready to ramp up stimulus in response to any signs of trouble.

“Ideally, the E.C.B. would like to announce tapering as noiselessly as possible,” analysts at Dutch bank ING said in a note to clients.

In addition, historically low interest rates will remain in place for the foreseeable future. The central bank has said it will not begin raising rates until it has stopped buying bonds, and only if the eurozone inflation rate is on track to hit the official target of 2 percent.

Still, some economists fear that the end of nearly free money will come as a shock for some weaker companies, free-spending consumers and overly indebted governments.

“The success of a relaxed monetary course is apparent not at the beginning, but when it ends,” Jörg Krämer, the chief economist of Commerzbank and a critic of central bank policies, said in a note to clients. “There are many risks involved, and the longer the E.C.B. delays before changing course, the greater they become.”