Jan. 21, 2015 7:33 p.m. ET So it’s here at last—Europe’s economic salvation, delivered by European Central Bank President Mario Draghi on Thursday when he announced a plan to buy sovereign bonds, also known as quantitative easing, or QE. Mr. Draghi has been anointed as savior-in-waiting for so long by so many that few are addressing the dread question of whether QE will work. We sympathize with Mr. Draghi, who is being asked to substitute for the failure of Europe’s political leaders to reform their economies. In 2012 he promised to “do whatever it takes” to preserve the euro, and on that point he succeeded. His vow crushed sovereign bond yields, and the threat of a euro breakup eased. What he hasn’t been able to do is revive growth in the eurozone, despite rolling out one program after another to stimulate more bank lending. He’s tried new financing options for Europe’s creaky banks, an asset-backed-securities purchase scheme to spur development of a more active credit market, and even a negative interest rate on bank deposits at the ECB. None of it has worked. European banks haven’t taken all of the ECB’s cheap money on offer, and indicators such as manufacturing output and economic confidence are lackluster. So now we have European QE, to the tune of €60 billion ($68.76 billion) a month. The bond purchases will begin in March and last at least through September 2016, in another attempt to boost bank lending and keep eurozone inflation near the ECB’s 2% target. Mr. Draghi says such a drastic move is justified because of the threat of deflation, but for now that is more excuse than necessity. Much of the recent decline in euro inflation is due to the 50% collapse of oil prices in the past six months. This shows up as deflation in the price data, but the decline in energy costs is an economic boon that should provide a eurozone stimulus. The U.S. Federal Reserve bought bonds at the long end to marginally reduce long-term interest rates. It’s likely the ECB will devote a major chunk of its buying to German bonds, but those yields are already so low that it’s unclear how much difference it will make. It also isn’t clear how much QE has contributed to U.S. growth. The QE lobby on Wall Street and Washington accord it wondrous powers. But former Treasury official David Malpass makes a strong case nearby that QE has been counterproductive by channeling credit to government and big business rather than the startups and smaller companies that drive growth. While U.S. growth continues to be slower than in any normal expansion, it has picked up since QE ended. Mr. Draghi has also talked down the euro exchange rate, to 1.14 or so against the dollar from about 1.40 last year, to boost exports and piggyback on the U.S. expansion. Perhaps the euro was overvalued as the euro crisis faded, but that doesn’t mean devaluation will lead to prosperity. Euro devaluation has costs and it is roiling currency markets, breaking the Swiss franc peg to the euro and raising the repayment costs of franc- and dollar-debts held by European institutions. Japan’s devaluation is instructive. The Bank of Japan has used QE to engineer a decline in the yen to about 117 per dollar from near 90 at the start of 2013. This has boosted the earnings of exporters. But devaluation didn’t reduce Japan’s demographic or regulatory barriers to growth, so Japanese companies remain reluctant to invest. Real incomes have fallen as households have to spend more of their weaker yen on imports. Two years after the start of QE and yen devaluation, Japanese growth remains anemic. The real benefit from European QE would be if it triggers more pro-growth economic reforms—in labor markets, business regulation and stifling taxes. Mr. Draghi has insisted at every opportunity that such reforms are essential, but the irony is that his monetary ministrations have taken the pressure off politicians to act. Falling bond yields have made it easier for leaders in France, Italy and elsewhere to postpone difficult choices. QE that further drives down yields on sovereign debt could make reform even less urgent, which is why so many politicians favor it. So Europe seems to be getting QE as a last-ditch growth default. Monetary policy has its uses, but it can’t perform miracles and it won’t be Europe’s growth salvation by itself.
Posted on: Fri, 23 Jan 2015 00:05:31 +0000
Trending Topics
Recently Viewed Topics
© 2015