While the U.S. awaits for the Federal Reserve to raise rates – and for now it seems less likely it will occur anytime soon – the ECB is taking the lead in order to provide more liquidity to the markets, depreciate the Euro and try to change market expectations about where the EU inflation is heading. This time, in the Draghi show on Thursday, the ECB President heavily hinted of plans to expand and extend the ECB QE program with possible announcements as early as December. Will this be enough to jump start the EU economy? What’s missing in this mix?
The ECB President hinted of possible higher QE program – currently it’s at a pace of buying 60 billion euros per month – in the near future. But he also opened the door for additional rate cuts in the future. And due to the deflationary concerns the ECB is worried that the EU won’t see any inflation let alone reach the 2%. As of last month the EU’s inflation was -0.1% and the core CPI was at 0.9%. The transitory adverse effect of low oil prices could perhaps not be so transitory after all and may be more persistent.
All these actions, while could help further boost the EU economy aren’t likely to be enough. The EU economy is much more divided compared to the U.S. and the labor market faces additional problems that aren’t in the U.S. including language barriers and bureaucracy — citizen registering when they relocate to a different country. Also, the peripheral countries in the EU continue to face high unemployment and problems in raising investments, while the main-land countries such as Germany have relatively high savings and investment rates and low growing wages – so the consumption isn’t growing fast enough to help boost imports from the peripheral EU countries. Basically, lack of investments will continue to hold back the recovery of the EU – mainly the peripheral countries. And now China, which was back in 2010 able to ramp up investment and help pull out the world from the global recession, isn’t doing so well either. So it’s up to Germany to change its policy. And without a fiscal stimulus or growth in investment it could take a long time before the EU comes out from its slump even if the ECB keeps ramping up its monetary stimulus.
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