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One of the problems I have always had with the ECB NOT pursuing QE earlier was that the EZ was effectively importing deflations from those economies which DID pursue QE - i.e. USA and UK - whose currencies where devalued relative to the Euro as a result.

I am more optimistic now because:

  1. QE has ended in US and UK so the earlier deflationary impact will be reversed
  2. Reduced Oil prices will improve disposable income and consumer expenditure in EZ
  3. Further devaluation of Euro will improve exports/reduce imports and make EZ a more attractive destination for FDI.
  4. Reduced Government debt service interest costs will increase Government expenditure by those Governments not ideologically wedded to austerity or facing general elections - e.g. Ireland, which has already angered European Commission by increasing expenditure/reducing taxes more than EC likes.
  5. A general election victory for Syriza which will will swing the political momentum from an ever increasing lurch to the right, and will also expose many of the shibboleths of austerity ideology.  Essentially Germany's bluff is being called.
  6. The combined effect of the above five factors will encourage the return of the "confidence faery" and increase the "feel good factor" amongst consumers and investors more generally.

I'm not saying it will be all plain sailing, but on balance I am an optimist that things will improve for the next 2 years at least - and QE directly will probably only be a minor contributory factor to that trend.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Jan 25th, 2015 at 10:45:34 AM EST
  1. I understand Coppola to be saying QE generalises deflation: "The ECB exports deflation to its currency partners: those partners export it back to the Eurozone."
  2. & 3. Oil prices may go even lower, and that is a genuine (but small) boost to purchasing power of ordinary people. Though the more the euro devalues, the less the oil price effect.
  3. Reduced interest costs may give a little leeway to government budgets.
  4. Is what we hope. But expect a full court press from the other side. The rentiers will not loosen their grasp, and they pwn the media.
  5. I pray to the confidence trickster fairy every night. Then I have nightmares.

There may be a slight improvement for a time, but stagnation is on the cards for longer.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Jan 27th, 2015 at 05:58:14 AM EST
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  1. Within a currency zone and its linked currency partners, maybe, but not wrt the rest of the outside world:  The EZ will be exporting deflation to USA, UK and the rest of the world, reversing the earlier trend.

  2. Yes this will be a key battle. Some German bankers have already been quoted as saying they expect Syriza to default/renege on their election promises.  I hope they are in for a shock.

Partly because of its demographics and age profile and partly because of the continuing erosion of its leadership position in the world, Europe has long been and will continue to be a low growth zone. Call it secular stagnation if you wish. However I am optimistic we will see an uptick in the business cycle for the next two years at least (always subject to unexpected shocks) and who knows after that.  

It should be noted, however, that the beneficial effects of QE, devaluation, and even lower oil prices and interest rates are to some extent once off which can kick start a recovery but not change longer term growth averages. I am predicting a cyclical upturn, not a fundamental shift in economic performance - unless we see Syriza kick starting a democratic revolution throughout the EZ. Not impossible, but unlikely, I would have thought.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 27th, 2015 at 09:15:07 AM EST
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