On Thursday last, in a momentous week
for Foreign Exchange and all that goes with it in Europe, the ECB announced the
commencement of Quantitative Easing in the Euro area.
I am grateful to the Wall Street
Journal for the graphic above, explaining how QE is projected to operate. It
applies to QE in the US, which has just ended, but the principle in the
Eurozone will the same, except that the money redirected to the banks is expected
to be used for business and consumption loans as well as for the purchase of
stocks, corporate bonds and commodities.
…
and it does work
Much commentary has been made about
the measures announced last week. A lot of it is characterised by remarks that
express doubts about if it will work, or the possibility of it being “too
little, too late”.
Our opinion is that it will work, the
amounts involved are appropriate, and now is exactly the right time for its
implementation in the Eurozone.
The economies of both the UK and the USA, where
QE has been a feature for quite some time, are now well on the mend. Much is
made of the situation in Japan, where the economy is still struggling after
many years of such monetary stimulus. But as Adam Carr has pointed out in the
Australian “Business Spectator”, Europe bears no resemblance
to Japan, in economic terms. The following is a short excerpt from his article:
“While … attention was
given to Europe’s supposed debt problems, Japan’s were -- and are -- far more
real and serious. Total debt (private and public sector) was around 460 per
cent of GDP on 2012 figures. That might be closer to 480 per cent now.
In contrast, Europe has
a much more respectable debt position of 178 per cent of GDP -- that’s total
public and private debt. There is, quite simply, no contest. Europe is not
Japan, for the simple reason that unlike Japan, Europe can afford to pay off
its debt. Japan in contrast has no reasonable hope of ever paying off its debt
burden, especially with a shrinking economy and a shrinking population.
Consider that the euro
area as a region runs smaller budget deficits that the rest of the advanced
world, and in contrast to many other developed nations runs a current account
surplus. This is an important fact. What it means is that Europe is
effectively a lender to the rest of the world. It’s fair to say that Japan also
runs a current account surplus, but let’s not beat around the bush: Japan’s
biggest export is the money the Bank of Japan prints. It prints the money and
then lends it out to the rest of the world. With much smaller deficits, much
lower net debt and that current account surplus, Europe need only redirect some
of the money that it lends abroad toward its own region. That is, if they were
overly concerned about growth. But growth isn’t everything, as they say”.
With regard to the timing – if QE had
been introduced earlier, at the time when similar measures were working their
way through the US and British systems, the Euro area would simply have made
itself part of a race to the bottom in global economic terms. It is precisely
when American and UK monetary policies are each diverging from that of the Euro
area that QE here will have the greatest effect.
We look forward to the EU, and the
Euro, once again demonstrating that they have a resilience that has often taken
commentators in other regions of the world, and even in Europe itself, by surprise.
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