Markets watchers are guessing about what comes next with the European Central Bank, given the path of monetary normalization in place by the Federal Reserve since 2015 , which creates an expected interest rate diferential between Europe and the USA markets in the range of 2,5-3% for 2019 .Traditional models (Mundelll Fleming approach), suggest that with flexible exchange rates, such diferential should adjust itself by free capital flows, such that an equlibrium global interest rate would prevail. While it is in progress, such adjutment weaken one currency (euro) and strength the other (dollar).This is good for EU export, however not that much good for domestic consumers,saving, and investment which
seek better and higher returns abroad.
So, sooner or later,it will be necessary to make corrections to close the gap.This means the European Central Bank applying its own normalization program. The key question is what the conditions in the EU are for such correction ?.Probably there are some doubts based on the fact that the EU economic growth (1,5-1,8%) ,does not seem to be so much strong as it has been the case for the USA (3-4%). Besides, the debt level (Italy) and unemployment( both France and Spain) of key partners are tecnically a threat for the success of such normalization meaning low market volatility and keeping the pace of current economic growth.
Besides , for the European Central Bank it is an unknown territory which will requires very precise skils to get the fine tunning of the adjustment path, leaving aside the role of complementary policies for those economies in weaker shape.
It will for sure an interesting case to follow.-
