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It’s not a magic bullet

Published Thursday, January 22nd, 2015

Today is ECB D-Day, when the teasing will stop. Today we will find out if the ECB is going to join in the currency wars and to what extent. The rumour is that it will be €50 billion a month from March through 2016. QE is effectively a form of competitive devaluation. The US has done it, the UK has done it, the Japanese have done it and now it is the turn of the eurozone even though Mario Draghi told the Davos Conference last year that QE is no magic bullet. It offers a breathing space and must be accompanied by structural reform to have any hope of success. No worries there then, the French and Italians have promised such reforms if they get QE!

Debt mutualisation is a very dirty phrase in the eurozone so the fear is that to meet German sensitivities it will be a watered down QE with national banks rather than the ECB as the guarantor of last resort. In the words of Angela Merkel “one must prevent the dealings of the ECB from easing the pressure for improvements in competiveness”. There has to be a distinct possibility that the QE announced today will create even greater and more bitter divisions than already exist. Europe is anything but a union when it comes to monetary and fiscal policy.

to read the rest of the report, please click here

Posted by David Hufton