Too Little, Too Late?

The European Central Bank finally announced today a 1.1 trillion euro program of quantitative easing (buying private bonds in addition to government bonds). It may not be enough, and the ECB won’t be getting much additional (fiscal) help from European governments.

Though ECB president Mario Draghi famously promised two years ago that the body he leads would do “whatever it takes” to save the euro, the consensus seems to be that today’s announcement comes too late to prevent a prolonged period of trouble for Europeans. Even this larger-than-expected round of QE will be hard-pressed to stave off the clear and present deflationary danger that necessitated it.

Of course, though the new monetary measures may fall short of alleviating that danger, European governments aren’t likely to budge from their hard line against fiscal intervention. Angela Merkel recently came out in favor of economic distres…er, pressure. And today Draghi himself said, “It would be a big mistake if countries were to consider that the presence of this program might be an incentive to fiscal expansion.” That’s despite historically low borrowing costs and high unemployment in large swathes of Europe.

We Americans should be careful about throwing stones, though. In a similar position for the last few years, we’ve also been relying on unorthodox monetary policy instead of fiscal stimulus. And as far as I know, the Europeans don’t even have the benefit of regular bridge collapses to point them toward a potential use of stimulus funds.

The two big problems with using QE instead of fiscal measures to revive consumption/inflation at the “zero lower bound” are that 1) it’s inefficient, and 2) it tends to exacerbate inequality.

They’re related problems. Since QE usually involves a central bank pumping money into the economy by buying private bonds from large corporations, the immediate beneficiaries are the wealthy (as this famous-but-not-terribly-nuanced video demonstrates). Hence its inefficiency; the wealthy are much less likely to spend additional income than the poor. It should already be clear now why it promotes inequality, unless you’re still practicing voodoo after all these years.

But for now quantitative easing is Draghi’s only viable option in Europe. The reason liberal economists like Paul Krugman support QE, despite its flaws, is that it’s probably better than nothing. Let’s hope so, for the Continent’s sake.

Oh, and speaking of Professor Krugman, here’s Draghi’s blunt reasoning for warning against fiscal measures: they “would undermine confidence.” Expecting a Confidence Fairy blog post in 3…2…1…