Price Bubble Threatens Slovak Economy

(Stock photo by TASR)

Bratislava, February 4 (TASR) – For more than a year the European Central Bank (ECB) has been supporting the eurozone through the quantitative easing policy, i.e. bond buyouts aimed at reducing interest rates, but pumping money into the economy results in many deformations that come to light sooner or later, said Economic and Social Analyses Institute economist Juraj Karpis on a discussion programme on TABLET.TV on Thursday.

“A price bubble is threatening Slovakia, as the money supply in the economy is growing at the same rate as it did shortly before the crisis in 2007 and 2008. Cheap loans might increase demand in the construction sector, but that doesn’t necessarily help the economy. There was enormous construction activity before the crisis in Spain, and now we see ghost towns there. So, caution is needed,” stressed Karpis, adding that a gradual increase in inflation is one of the goals of quantitative easing with price growth approaching 2 percent annually.

This has not been accomplished yet, as the eurozone is experiencing a period of moderate deflation, i.e. price decline. “However, it isn’t right to look only at consumer inflation and ignore the largest market – the bonds market. The USA also kept an eye solely on consumer inflation before the crisis, and everything seemed to be okay, but they ignored the prices of houses, shares and bonds, and then the whole thing collapsed,” warned Karpis.

In Karpis’s opinion, the eurozone should function in terms of the economy like the USA, where there is a common currency, but each federal state has its own budgetary policy. “Simultaneously, individual eurozone members would be accountable for their debts, which means that it would be possible to let them go bankrupt. This was violated in 2010 in the case of Greece, but it should be resumed. If anyone has a problem and must restructure their debt, we shouldn’t pay attention to whether it would damage a French or German bank or not. The French or German government should take care of it,” stressed Karpis.