The decoupling of fundamentals and asset prices in the euro zone

The ECB will keep its monetary policy ultra-expansionary in 2021 to facilitate the financing of fiscal deficits and to continue to prop up companies and demand. Interest rates should therefore be expected to remain very low at all maturities and liquidity to be increasingly abundant. Also, the new health regulations will lead to lower productivity and higher unit production costs and will therefore drive up inflation in the future. With nominal long-term interest rates remaining very low and higher inflation, real long-term interest rates can be expected to be highly negative in 2021 in the euro zone and the money creation will likely result in massive asset purchases. This reinforces the likelihood of bubbles in the prices of all long-term asset s other than bonds: equities, real estate, infrastructure, private equity, etc. These bubbles will inflate even if the economic recovery in 2021 is weakened by the supply-side problems facing the euro-zone economy: there will be bubbles even if economic fundamentals remain poor , given the exceptional nature of monetary conditions.