Europe after Paris

After Friday 13th tragic events, France and Europe have a number of responses to prioritise, such as; tighter defence, stronger security and a greater need for an economic recovery. The importance and effects of these will differ between the various countries concerned, and in so doing this will impact the different economies in different proportions. This will change the equilibrium national rates of inflation and have implications for the various countries’ balance of payments positions – and hence their TARGET2 balances. To achieve these different effects, Europe must move closer to a single political and fiscal state, otherwise the existing fault lines in the system will widen and force TARGET2 into another unintended role. In the near term, we expect the size of the ECB’s asset purchases to increase as 9/11 showed us that policymakers have a freer hand when crisis’ strike and there’ll be less pressure for long overdue structural reforms. We fear that these effects will be positive for growth and markets in the near term but negative over the longer term. In reality, we would say that the awful events have increased the pressure on Europe either to seek political unification at an accelerated pace or return to the concept of a free trade area that is comprised of a union of individual nation states.
Blog by Sophie

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