Standish made the observations in its April Outlook, written by Thomas Higgins, global macro strategist at the firm.
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According to the report, the conflicting viewpoints of members of the ECB’s governing council appear to limit the bank’s actions.
Standish said that it does not believe the ECB will move to reduce volatility and improve liquidity until the sovereign spreads in Spain and Italy approach previous highs.
"Our expectation is that Europe will continue to be a source of global financial market volatility in the coming months," said Higgins.
Higgins continued by commenting that the large disparities in economic growth and inflation expectations between euro zone economies may complicate the European Central Bank’s (ECB) ability to act.
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By GlobalDataThe report also opined that monetary policy is too loose for Germany and too tight for almost every other country in Europe.
"The ECB’s long-term refinancing operation (LTRO) has certainly helped to reduce systemic risk in the banking system," said Higgins. "However, the LTRO’s honeymoon with investors may be ending as they realize that the flood of liquidity does nothing to address Europe’s underlying solvency problems."
David Leduc, Standish’s chief investment officer said, "The volatility is likely to lead to continued range-bound trading for rates near term."
The Standish suggested that European leaders need to take a number of steps to safeguard the future of the euro. The steps suggested by Standish include: lifting restrictions on the free flow of capital and labor across borders; harmonizing tax entitlement programs; developing a true pan-European budget that allows for transfer payments from stronger to weaker regions in the currency area, and creating a true euro zone bond issuance program.
Such measures could take years to implement, but investors likely would take comfort that Europe would be working toward a common goal, Standish report concluded.
