The renewal of the Eurozone after 10 years of crises?

// Jack C //

This Thursday 26th of October, Mario Draghi, otherwise known as the president of the European Central Bank (ECB), made the well awaited announcement that the ECB would cut it’s Quantitive Easing (QE) by half. This announcement came after what can only be described as a very strong second quarter by the 19 countries of the Eurozone. For instance, the average GDP of the zone increased by a steady 0,7%, whilst unemployment continued to decrease, the Eurozone grew at least three times quicker than the UK during this same period of time.

Let’s take a moment to go back in time and contemplate what QE in the Eurozone implied when it was first implemented in 2015 by Mario Draghi himself. At that time the Eurozone was fighting off recession and unstableness all thanks to a succession of crises, the most devastating of which was the sovereign debt crisis in 2012 that struck southern European countries creating a chain reaction that lead the Eurozone into a general economical slump. The goal of QE was to inject as much money as possible into the economy to guarantee growth and an inflation rate of 2%.

This new QE policy, which consists in injecting no more than 30 billion euros into the European economy every month, will take effect in January 2018. This policy is set to last until September of the same year but Mario Draghi was very clear in his address that this new policy is a drastic change but it may not be a definite one. Of course the idealistic outcome of such an economical tool as QE is that with time it can be gradually decreased until ceasing existence having given the economy a new lease of life and the possibility to function by it’s own means. This is why Mr Draghi can’t and won’t say that they will keep decreasing the amount of money injected into the European economy from September 2018, it would scare investors and send the euro plummeting, so on the contrary the ECB has envisaged making  a u-turn if necessary, a sort of safety net which IMF managing director Christian Lagarde very much agreed with. It seems that the ECB has learnt from the mistakes of their US counterpart, the FED, who announced in 2013 that they would immediately cease all QE thus sending Southern American emerging markets into a free fall.

Experience in economy and finance has taught us that we should always consider things with a pinch of salt, in this case we should take a good handful. Many fear that a very plausible outcome of the prolonged QE in the Eurozone has produced bubbles that if unsustained by a continuous feed of money from the ECB, will end up bursting. The central bankers of the ECB might intend to deal with these once QE has had it’s last word, however cracks are already starting to show: Spain, whose economy is enormously  sustained by it’s building industry, has more houses for sale than the whole of the United States of America. Figure that out…

 

 

The long and noisy road toward normal monetary policy, Financial Times Hard Currency Podcast, Micheal Hunter, 28/10/2017:

https://itunes.apple.com/fr/podcast/ft-hard-currency/id527135392?l=en&mt=2&i=1000394052990

La BCE réduit à petits pas ses soutiens à l’économie, Le Monde, Marie Charrel, 28/10/2017:

http://abonnes.lemonde.fr/economie/article/2017/10/27/la-bce-reduit-a-petits-pas-ses-soutiens-a-l-economie_5206753_3234.html?xtmc=fed&xtcr=1

La Banque centrale européenne tâtonne, Le Monde, Marie Charrel, 28/10/2017:

http://abonnes.lemonde.fr/economie/article/2017/10/28/la-banque-centrale-europeenne-tatonne_5207180_3234.html?xtmc=bce&xtcr=2

ECB to half bond buying as it plans to scale back qualitative easing, The Guardian, Richard Partington, 26/10/2017:

https://www.theguardian.com/business/2017/oct/26/ecb-to-halve-bond-buying-as-it-plans-to-scale-back-quantitative-easing

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