The Eurozone Battles Deflation

Andrew Sullivan —  Jan 23 2015 @ 1:20pm

Matt O’Brien describes the European Central Bank’s new $1.3 trillion quantitative easing program:

[T]he ECB will buy €60 billion, or $69 billion, of assets a month—including government, institutional and private sector bonds—and will do so until at least September 2016, or until there’s a “sustained adjustment in the path of inflation” toward their close-to-but-below 2 percent goal. To give you an idea how far away that is, prices are actually falling in Europe—a seriously worrisome sign—with euro-zone inflation currently at -0.2 percent. It’s no wonder that Europe’s economy still has 11.5 percent unemployment and is growing so slowly that it’s not clear whether it’s even gotten out of its last recession.

Cassidy has FAQ on the plan. Why it might not work:

Pessimists say that the E.C.B. has waited too long and allowed the deflationary mindset to become too heavily entrenched. They also point out that interest rates in Europe are already very low, and that, even with the E.C.B. spending sixty billion euros a month on bond purchases, there isn’t much room for rates to drop lower. Given these problems, some analysts think that even Q.E. infinity won’t have much impact. Speaking in Davos on Thursday, Larry Summers, the former Treasury Secretary, said, “It is a mistake to suppose that Q.E. is a panacea in Europe, or that it will be sufficient.”

But he still supports this action:

In the past few months, investors were predicting this move, and they bid down the value of the euro. On Thursday, it dipped under $1.15, and it is likely to fall further. Parity with the dollar is perfectly conceivable. The fall will raise prices inside Europe, which is what is needed when deflation has taken hold, and it will give a boost to European exports, which should help stimulate growth.

Raoul Ruparel doesn’t think it’ll be enough:

The ECB has now used the last tool in its toolbox. For all intents and purposes it has limited wiggle room. There is likely to be some pick up inflation over the next two years – maybe 0.5% to 0.7% (bringing overall inflation to around 1% annually), though some of this was due anyway. But to a large extent the QE programme will do little to boost growth in the Eurozone and may not help those countries most in need of it. The ball is firmly back in the court of Eurozone leaders to implement the serious reform as well as the institutional changes which the eurozone has always needed.

And Paul Wallace has concerns about the way this QE is being implemented:

The council’s decision on QE reflects a compromise. The scale of the programme is bigger than expected. But the trade-off for that is an important breach in the ECB’s usual risk-sharing arrangements, which creates within the very heart of the monetary union the fragmentation it has been seeking to fight. That is a worrying augury for a programme on which so many economic hopes now rest.

Mark Gilbert applauds the ECB’s actions. But he worries that “the initiative risks delivering too little, too late”:

[I]t’s been six long years since the Federal Reserve started QE in the U.S., and almost as long since the Bank of England hooked the U.K. onto life support. Those economies (and their consumers) are only now seeing the benefits. Euro voters may yet live to regret the ECB’s delays.