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ECB push to defeat deflation is a concentrated ‘all in’ strategy


ECB push to defeat deflation is a concentrated ‘all in’ strategy

european euro banknotesYou have to give it to the president of the European Central Bank, Mario Draghi. He is no slouch when it comes to political will. While almost all of the ECB’s members banks know that deflation is a bigger enemy than inflation, there are sharp disagreement as to which direction to take. Germany is the most vocal critic of any quantitative easing scheme since the effectiveness of such schemes are still pretty much open to question. One only needs to look at the Bank of Japan’s experience after crashing the yen. In fact, instead of getting inflation to its 2% target, all of the BOJ’s easing has managed to produce sub-par inflation at around 1%. Hardly a resounding success.
Still, it appears that backers of quantitative easing had Draghi’s ear as they point to the success of such monetary policies in the US. The US has racked up quarter after quarter of nice GDP gains. Moreover, for a 16 week period, its unemployment claim numbers haven’t broken past 300,000. While jobless claim numbers have been rising in the past 3 weeks, the overall sunny economic picture in the US as well as the IMF’s improved forecasts for American economic performance may have helped Draghi make his decision.
One thing is for sure, Draghi’s move to pull the trigger on quantitative easing is sure to cause even greater rifts in the Eurozone. It’s not like the more prosperous and fiscally sound countries in the 19 country economic union aren’t already feeling they are subsidizing the unsound and even profligate economic policies of their poorer neighbors. In terms of political will, the ECB’s decision is a coup. It remains to be seen whether it was the wisest move to take.

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