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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

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