Is Quantitative Easing the solution for the Eurozone?
Considering Quantitative Easing (QE) to be an effective way to save the Eurozone from deflation, De Grauwe and Ji (2015) argue that a QE programme can be so structured as not to pose a risk on German taxpayers – this risk being seen as the main obstacle against active policies by the ECB. However, they seem to miss some important points.
First, they fail to recognize that there is little convincing evidence that QE has any significant effect on consumer price inflation: QE does not buy-up ordinary goods and services, and consequently it does not create consumer price inflation. QE has delivered positive effects only when it has been implemented in conjunction with decisive fiscal stimulus, since it has counteracted the interest rate rises that deficit and debt growth would have otherwise caused. Giavazzi and Tabellini (2015) note that an accompanying fiscal expansion is critical to QE’s effectiveness. Yet fiscal expansion does not appear to be an option in the Eurozone, especially in already largely indebted countries, as it would trigger offsetting effects linked to Eurozone members having issued debt in a non-sovereign currency, which would neutralize the action of QE combined with fiscal expansion.