January 23, 2015 2:13 pm
If you have read or listened to the news these past days, you have probably heard already the expression: quantitative easing. Yes, that’s our IATE term of the week. Not only because it’s on every European citizen’s mouth, but because it will be what – hopefully – will save the Eurozone from the terrible crisis and stagnation we have been faced with.
But does everyone know what ‘quantitative easing’ actually is? Easy to just say that it basically means printing new money. But that’s a very plain simplification. The truth is that central banks use a more complicated process to inject cash into their economies – by buying assets, typically government bonds, from banks or other financial institutions such as pension funds. The goal is having banks use the extra funds to increase lending to households and small businesses.
But yet again, this is all theory and cheerful hopes. In fact, quantitative easing could be a very risky policy too. One of its biggest side effects could be, indeed, allowing inflation to get out of control. This is basically what Germany fears the most, and the reason why quantitative easing has always been rejected by Angela Merkel.
But now, the man of the moment, Mario Draghi, President of the European Central Bank, has finally won the arm wrestling with the German government. He announced yesterday, on 22 January, that the ECB is going to use this unconventional practice as a tool to stop the recessive spiral that seems to have overtaken the European countries as a whole. Quantitative easing, however risky it may be, is not such a desperate and rare measure for central banks, for it had been recently applied by several other countries, with mostly positive effects. Some of you may remember that the American Federal Reserve itself tried to slow down the financial crisis in the United States during those dark days of 2008 with this same procedure, achieving acceptable results and a sustainable inflation. The Bank of England followed the very same path in 2009, altogether with expenses cut and floating results. Many complained that quantitative easing mainly helped the banks and richest social classes, doing very little for the overall economy, while the Bank replied that it had a comprehensive positive effect that affected the job market and put a working patch on the big crunch that was dragging Britain down. It seems that quantitative easing is a powerful tool that can lead to positive results and side-effects, but, as many other economic theories, has to pass the test of reality. Which didn’t happen in case of Japan: ironically, the country that first invented the practice is the one in which the theory has proven false. The last quantitative easing programme started in 2103, but the weak results are now taken as proof that quantitative easing can be risky and dangerous by the critics of the method.
Will quantitative easing work for Europe? We unfortunately can’t have this answer yet. What we can say is that if there is any chance this “cure” may be useful, it is worth trying. There is not much left to lose.
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By Sabina Grixoni
Editor and Social Media Strategist
Communication Trainee at TermCoord
Social Media Specialist
Communication Trainee at TermCoord
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