Friday, January 23, 2015

Eurozone Quantitative Easing - good for Britain?

Quantitative Easing has been effective in the UK and the U.S. and there is no reason why it should not be so in the Eurozone as well. The scale is large but it has to be if it is to work. In a way the timing for the European Central Bank is  good because the lessons from the US have been learned. Gradually people are realising that to look at the Eurozone in narrow country terms is missing the point. It's as if the U.S. Treasury worried about the effect on Arkansas when it took macroeconomic decisions - such as QE. Like if or not the Eurozone pools sovereignty just as the member States of the federal United States give up sovereignty. The concerns about Greece are not that Eurozone actions won't eventually be effective there. They will, albeit with struggles along the way. The concern is that local Real Politick will trump Eurozone action. QE is timed (perhaps) to demonstrated especially to the Greeks that they can continue in the long term to benefit from being part of the Euro. 

As for Britain the exchange rate is only one component. QE is designed to stimulate growth and demand. Most of that will be satisfied internally within the Eurozone where of course there are no exchange rate complications. It may be that successful application of QE will see that growth without any major fall in Euro value relative to the Pound though I doubt that this will be uppermost in the ECB's mind! The €/$ rate is a different matter. The fall in the Oil price means that a weaker Euro relative to the dollar is less damaging than it would have been. As a net importer of energy, which is dollar denominated, this is not a bad time to take measures which may see further falls in the value of the € relative to the $.

I suspect George Osborne, in saying that Eurozone QE is good for Britain, was thinking more of the benefits to the UK a healthy or at least a recovering Eurozone rather than the downside of the negative exchange rate effect on exports to Eurozone customers.


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