Euro zone: The ineffectiveness of expansionary monetary policy in the absence of capital mobility between euro-zone countries

Capital mobility between the euro-zone countries became very low in 2010, as the countries with surplus savings (Germany, Netherlands) no longer wanted to lend to the other countries. This considerably reduced the effectiveness of the expansionary monetary policy that was implemented : the fall in interest rates stimulate d investment demand; but in the euro-zone countries other than Germany and the Netherlands, the desired additional investment could not be carried out as these countries are subject to an external balance constraint (they could no longer borrow from Germany or the Netherlands). These countries long-term interest rates therefore rose again to the level where investment was so low that the external equilibrium was reached. The lack of capital mobility between euro-zone countries therefore markedly reduced the effectiveness of the ECB's monetary policy by preventing Germany's and the Netherlands’ excess savings from financing additional investment - which an expansionary monetary policy normally gives rise to - in the other countries.