Europe has struggled to rebound from the Great Recession. A few years ago, it appeared that the EU and the United States were recovering at roughly the same pace, as shown by this graph of World Bank data on GDP growth rates. In 2012, the EU dropped off of the path to recovery, posting a -0.4% growth rate, while the United States continued to chug on at around 2% growth per year. This divergence was largely a product of the two different policy approaches taken by the central banks of each economy. In the US, the Fed engaged in three separate rounds of large monthly bond purchases, or quantitative easing, with the goal of expanding the money supply and lowering interest rates. In contrast, the European Central Bank responded with the European Financial Stability Facility to provide liquidity to EU members, and several European states undertook austerity policies. It may be slightly naive to attribute all of the US economy’s recovery to quantitative easing, but it certainly appears to have been incredibly effective.
So why did the EU not even attempt quantitative easing while the Fed was rolling out several rounds of it? One big obstacle that the ECB faces is the fact that it is composed of a multitude of national central banks, making it more difficult to coordinate asset purchases. However, it appears that the time may have finally come for the European Central Bank to enlist the help of quantitative easing. As reported in the Wall Street Journal, the ECB’s executive board has proposed a 12-month (at minimum) round of QE, composed of asset purchases of 50 billion euros per month. The bank’s governing body will meet Thursday to discuss the proposal. As noted by MIT professor Athanasios Orphanides in the Journal article, “the potentially open-ended nature of the program—the idea the ECB could continue beyond a year—is a bright spot that could give the program additional power”, since many economists believe one of the core strengths of quantitative easing is the effect on the market that expectations of aggressive future monetary policy can have.
As news of the potential ECB actions broke, the euro fell against the dollar – good news for the multitude of European states that rely heavily on exports to fuel their economy. Italian prime minister Matteo Renzi was one of those who welcomed the news, who claimed that he dreams of parity between the Euro and the Dollar in an interview with the Wall Street Journal earlier today, believing that it would grant Europe greater economic flexibility. However, it is not good news for everybody – German officials oppose the ECB plan, as noted in the first Journal article, since German taxpayers have concerns that they would be responsible for the more risky debt of other European countries. Nevertheless, it appears to be the case that the ECB will carry out quantitative easing, having tried almost everything else, in an attempt to resuscitate the stagnant European economy.