Economic Activism: Europe’s Struggles with Monetary and Fiscal Policy

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Man and woman looking at signpostEconomics, and by consequence, investing, can always be contextualized and discussed relative to fiscal and monetary policy. This is true whether investment professionals find themselves in the aftermath of the Great Recession, in the next Nifty Fifty era, or if it is just another day of market vagaries. Not surprisingly, monetary and fiscal policies will be part of many discussions at the 2015 European Investment Conference.

From 1991 and the fall of the former Soviet Union to the global financial crisis, monetary and fiscal policy was standardized. Central banks intervened occasionally and indirectly in markets, while fiscal policy, even if divisive, tended to be coordinated within nations. Arguments between competing political parties about economic policies were usually nuanced and not entrenched.

But now everything has changed. Monetary policy is activist. Fiscal policy is gridlocked. Prices in many markets appear distorted and routinely defy the conventional wisdom. Income inequality is growing. “Too big to fail” banks remain. And a massive debt crisis led to more leverage in the global financial system, not less. Most investors are waiting for the match to light the next economic and investment blaze.

So far in 2015, the primary setting for these tensions is the crisis in Greece. Germany and its supporters overcame what appeared to be insurmountable odds to win concessions from the socialist Greek Prime Minister, Alexis Tsipras. Specifically, after the Greek people roundly voted to reject a bailout offer, just days later the Greek negotiators agreed to further austerity measures. This success has left both sides reeling, with Tsipras trying to hold together his coalition government, and German leaders defending against criticism that the EU is now a German institution.

Globally, the United States Federal Reserve is under scrutiny for the timing of an inevitable interest rate rise. But competition for the title of “which central bank will raise rates first” comes from the Bank of England, also believed to be leaning to a rate rise in 2015. Among the important questions are: is the post–Great recession run up in asset prices due to massive quantitative easing? Are the rate rises soon enough to stave off further inflation? Will rate rises scuttle tenuous economic growth in major economies?

Meanwhile in Japan, Abenomics appears to have mixed results. Yes, there is inflation, yes there is a run up in the Nikkei, but consumer spending is not accelerating at the expected rate. The jury is still out on the efficacy of these monetary and fiscal policy maneuvers.

Fiscal policy does not get a free pass from scrutiny, though. After all, in the EU and the United States gridlock at the fiscal policy level may be the very reason for loose monetary policy. Put another way, absent thoughtful consensus on how legislation can help the global economy, what are monetary authorities to do in order to take up the noticeable slack?

Clearly, analysts are coping with a complex macro world of monetary and fiscal turmoil. These issues, perhaps fortunately, affect most investors equally — by focusing on refining their own methods for making sense of economic information, analysts may gain an edge.

At the forthcoming 2015 European Investment Conference, many speakers are presenting such skills. You can attend the event to hear Dan Ariely and Tim Harford discuss ways that psychology can improve financial decision-making. Halla Tomasdottir will talk about the ways that new perspectives can lead to more effective investment outcomes. Other sessions at the conference will also provide valuable insights on the region’s most pressing economic developments, alongside sought-after technical workshops.

Keep up with information and updates about this event by subscribing to the European Investment Conference blog.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/Retrorocket

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