The ECB’s New Macroeconomic Realism

The European Central Bank has finally crossed the Rubicon and launched a bold policy of quantitative easing, which may help arrest Europe’s slide into stagnation. Even if it is not an effective growth strategy, QE should be welcomed; indeed, the ECB should be encouraged to do everything in its power to ease monetary conditions.

NEW YORK – The European Central Bank has finally launched a policy of quantitative easing (QE). The key question at this stage is whether Germany will give the ECB the freedom of maneuver needed to carry out this monetary expansion with sufficient boldness.

Though QE cannot produce long-term growth, it can do much to end the ongoing recession that has gripped the eurozone since 2008. The record-high stock-market levels in Europe this week, in anticipation of QE, not only indicate growing confidence, but are also a direct channel by which monetary easing can boost both investment and consumption.

But some observers, such as Nobel Laureate Paul Krugman and former US Treasury Secretary Larry Summers, continue to doubt whether QE can really be effective. As Krugman recently put it, a “deflationary vortex” is dragging down much of the world economy, with falling prices causing an inescapable downward spiral in demand. The World Bank and International Monetary Fund seem to agree, as both recently lowered their growth forecasts a few notches.

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