1. GROWING GEOPOLITICAL RISKS AND PROSPECTS FOR ECB MONETARY POLICY
Đorđe Đukić, University of Belgrade, Faculty of Economics
Mališa Đukić, Union University Belgrade, Belgrade Banking Academy

2. CONTENT OF THE PRESENTATION
GROWING GEOPOLITICAL RISKS IN THE WORLD AND POSSIBILITY OF OUTBREAK OF NEW WORLD ECONOMIC CRISIS
SLOWING DOWN OF NORMALIZATION OF FED MONETARY POLICY IN 2019 AND BEGINNING OF 2020
PROSPECTS FOR ECB MONETARY POLICY NORAMALIZATION

3. GROWING GEOPOLITICAL RISKS IN THE WORLD AND POSSIBILITY OF OUTBREAK OF NEW WORLD ECONOMIC CRISIS
Due to the growing geopolitical disturbances during 2018 and beginning of 2018 the world is inclining towards potentially new economic crisis.
The key geopolitical disturbances include potential trade war between China and US, uncertainty related to the end of negotiations between EU and Great Britain as well as the voting on Brexit in British parliament, high probability of right-wing parties winning the majority in European parliament following the elections in May 2019, etc.
What are the factors that from the economics point of view could reflect the abovementioned geopolitical disturbances and may imply the possibility of outbreak of new world economic crisis?

4. GROWING GEOPOLITICAL RISKS IN THE WORLD AND POSSIBILITY OF OUTBREAK OF NEW WORLD ECONOMIC CRISIS
First, there is a small difference in yields between short-term and long-term government securities in developed countries.
Secondly, a growing corporate bonds market in developed countries in the last decade implies a growth of USD 10 trillion from 2008 to There is a significant number of companies that have issued corporate bonds with low ratings
Thirdly, the buy-back of shares by major companies and banks in US and other countries. In December 2018 in US the announcements on buy-back of shares exceeded the amount of one trillion USD for the first time.
Fourth, the third largest economy in Eurozone Italy is facing a technical recession in the fourth quarter of 2018, for the first time after 2013

5. GROWING GEOPOLITICAL RISKS IN THE WORLD AND POSSIBILITY OF OUTBREAK OF NEW WORLD ECONOMIC CRISIS
Fifth, third and fourth quarter real GDP growth rates in 2018 in Eurozone was only 0,2%. In 2018, the overall real GDP growth was 1,8% which was a weak result due to the expectation that the growth rate would be close to 2017 growth rate of 2,3%.
Sixth, the possible trade war between US and China in case China does not introduce measures that would reduce its foreign trade surplus with US. In case of unsuccessful negotiations US threaten to increase its customs duties on Chinese goods from 10% to 25% and extend the number of goods worth EUR 200 billion that are subject to import taxation.

6. SLOWING DOWN OF NORMALIZATION OF FED MONETARY POLICY IN 2019 AND BEGINNING OF 2020
Figure 2: Current Target Rate Probabilities for 19 June 2019 FED Meeting
Source: CME Group, rates/countdown-to-fomc.html,

7. SLOWING DOWN OF NORMALIZATION OF FED MONETARY POLICY IN 2019 AND BEGINNING OF 2020
Figure 4: Current Target Rate Probabilities for 20 January 2020 FED Meeting
Source: Ibid. .

8. SLOWING DOWN OF NORMALIZATION OF FED MONETARY POLICY IN 2019 AND BEGINNING OF 2020
Statement of Jerome Powell from March 2019 indicates that FED may delay increase of key interest rates for 2020 mainly due to the unfavorable developments in the world economy.
Such an opinion may be caused by public critics made by president Trump on the decisions to increase key interest rates during 2018.

9. PROSPECTS FOR ECB MONETARY POLICY NORAMALIZATION
The announcements of ECB officials made in 2018 which implied a beginning of gradual normalization of its monetary policy in would not be implemented. The non-conventional measures of ECB monetary policy will continue to apply in the following period.
This is due to not only prevention of entering recession in Eurozone, but also due to the long-term trend of decline in natural real interest rate (r*) in Eurozone following the outbreak of financial crisis in as concluded by Holston, K., T. Laubach, J. C. Williams (2016).

10. PROSPECTS FOR ECB MONETARY POLICY NORAMALIZATION
The above stated implies that the big market players and investors such as insurance companies will continue to face similar market conditions that generate small yields on government securities during 2019 and This specially applies to long term government bonds of Eurozone countries with lowest risk.
Taking into account the government bond market developments during 2019 and 2020 insurance companies in Europe will be under additional pressure to continue to increase their investments in illiquid assets and in assets with lower quality.
In case of deterioration in the credit quality of illiquid assets, insurance companies need to have a plan of defined measures that they would undertake based on the stress test results.

11. Figure 7: Yields on ten-year bonds of selected Eurozone countries. (1
Source: Bloomberg,

12. Source: Bloomberg, https://www.bloomberg.com/quote/VIX:IND, 19.3.2019.
Figure 8. Chicago Board Options Exchange, SPX Volatility Index (VIX:IND)
( )
Source: Bloomberg,