The ECB’s Faulty Weapon

With inflation in the eurozone stubbornly remaining on a downward trajectory, pressure on the European Central Bank to do “something” to prevent outright deflation is growing. But, given the financial structure of eurozone countries, would the preferred "something" – quantitative easing – actually do the trick?

BRUSSELS – With inflation in the eurozone stubbornly remaining on a downward trajectory, pressure on the European Central Bank to do “something” to prevent outright deflation is growing. This “something” is usually understood to be massive asset purchases, or quantitative easing (QE). But would QE actually do the trick?

The discussion has so far followed easily predictable national patterns: Creditor countries do not object to deflation, because it increases the real value of their investment, whereas debtor countries’ repayment burdens would grow heavier.

In a closed economy, to every credit there must a corresponding debt. But consider individual countries: some run a large foreign debt, while others maintain a large creditor position.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

or

Register for FREE to access two premium articles per month.

Register

https://prosyn.org/lr2CAx3