Around a month ago, the Fed started dropping some hints about conducting another round of quantitative easing to prop up the struggling U.S. economy. Then, the BOJ followed suit by announcing that it’s considering a 5 trillion JPY expansion of its bond purchases. The BOE might soon join the pack as some of its policymakers are also insisting that the U.K. needs more stimulus.
While “QE Round 2″ seems to be the latest fad nowadays, the ECB still wants to be in a league of its own. During their press conference yesterday, ECB President Jean-Claude Trichet announced that they are unlikely to implement more QE. Judging from the recent growth figures from euro zone‘s hotshot economies, it does look like they’re on a roll!
Besides, Trichet also mentioned that inflation is within their target range and that risks to price stability are “slightly tilted to the upside.” Then again, isn’t euro zone the region with the longest list of problems? Is the ECB’s confidence really warranted?
I’m no doctor, but I wouldn’t exactly declare the euro zone completely headache-free. Many of its member nations, such as Greece and Ireland, are still struggling to rein in their enormous debts. We’ve heard tons plans to tackle these deficits, but you have to understand that it takes time to implement these changes and even more time for them to take effect.
You also have to consider the possible drawbacks of future austerity measures. The euro zone puts its economic growth at risk by cutting back on government spending. How can you expect economic activity to pick up when the region’s biggest spenders (governments) are keeping their money in their pockets?
When the euro was depreciating, it used to provide a cushion for the region as it helped negate some of the effects of austerity measures by helping to boost exports. Those days are gone. The euro’s recent rise looks as though it may harm the euro zone’s exports by making their products more expensive in global markets. Ouch!
If you ask Mr. Trichet, the answer you’ll get is, “Of course we can!” Trichet believes that the euro zone can maintain momentum, pointing to the fact that commercial banks have cut back on making use of ECB lending programs. This indicates that lending conditions are improving, which could help spur spending down the line.
While this strategy might be reverting from the norm, we must remember that the ECB is old school. Historically, the ECB has been one of the less aggressive central banks. Even when the Fed was bombarding the market with crazy amounts of bond purchases, the ECB took a more subtle approach, although I’m sure central bank members were squirming in their seats even at those amounts.
For now, it seems that their approach is working. But only time will tell whether it will continue to do so.