Differing opinions remain about possible QE in Europe


January 24, 2012

Earlier this month, European Central Bank president Mario Draghi told The Financial Times that the ECB wouldn't be pursuing any kind of QE strategy, since it would ultimately put Europe in a weaker macroeconomic position in the long run and wouldn't prevent any of the reforms which are presently required.

"Devaluing your currency, you create a big inflation, and at the end of that road, the country would have to undertake the same reforms that were due to begin with, but in a much weaker position," he said during an interview with the Times.

Draghi added in the interview that a number of steps were needed to get the European debt crisis under control - starting with countries getting their fiscal houses in order and using the enforcement steps laid out at the recent EU summit.

He also added that it would be in the best interests of the region to have the European Financial Stability Facility up and running. In the long-term, he said the crisis requires that nations retain financial discipline and work to restart economic growth.

However, others have said that quantitative easing remains on the table if steps are needed to stabilize flailing capital markets. In a separate interview with the Times, Lorenzo Bini Smaghi, an ECB executive board member said that the ECB might consider the Federal Reserve-style step if economic conditions continued to worsen.

"I do not understand the quasi-religious discussions about quantitative easing," Bini Smaghi, who is set to step down shortly as a member of the ECB, told the paper. While he said that the current conditions did not necessitate such a step "if conditions changed … I would see no reason why such an instrument, tailor-made for the specific characteristics of the euro area, should not be used.

"The ECB has already taken some steps in order to ease some of the current tension. Last week, the central bank gave out nearly €500 billion in loans to hundreds if banks to support liquidity. Some analysts however, say QE remains nearly inevitable."

The European Central Bank has helped settle nerves and boost sentiment with its three-year liquidity tender this week," David Owen, chief European financial economist at Jefferies, told the Times. "But I don’t expect the fragile truce in the markets will last long. The ECB will surely have to launch QE at some point. I suspect it might be sooner, rather than later."

 

 

 

 

 

As parts of Europe continue to deal with significant financial instability, some economists have floated the idea of a potential round of quantitative easing to boost the market. However, those with the European Central Bank have given mixed opinions about such a monetary step.

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