Quantitative Easing for the People

OXFORD – It is now a near certainty that, by the end of this year, falling energy and commodity prices will push annual inflation in the eurozone below zero – well under the European Central Bank’s target of near 2%. Rather than continue to allow misguided conventional thinking, centered on German economic ideology, to impede effective action, the ECB must pursue quantitative easing (QE) “for the people” – an adaptation of Milton Friedman’s “helicopter drops” strategy – to reverse deflation and get the eurozone back on track.

As it stands, conventional monetary policy has had – and American-style QE will have – little impact on the eurozone’s core countries. This can be explained partly by the fact that, when it comes to credit provision, capital markets do far less of the heavy lifting in the eurozone (where banks matter more) than in the United States. As a result, bringing down yields on government, corporate, and asset-backed bonds has less impact.

At the same time, the euro exchange rate – the one mechanism whereby current policies could still make a difference – cannot be pushed down much further. For starters, given the eurozone’s huge trade surplus, doing so would incur strong international resistance. Moreover, the mechanisms by which the US Federal Reserve’s purchases of asset-backed securities stimulate consumer spending – low mortgage rates, widely available home refinancing, high housing prices, and home-equity withdrawal – function differently in the eurozone.

In Germany, France, and Italy, higher house prices spur non-owners to save more for the down payment and inspire caution among tenants, who expect future rent hikes. And the housing wealth of existing owners does not translate into significantly higher spending, given the lack of access to home-equity loans and cheap mortgage refinancing. Finally, in countries like Germany, where households’ bank and saving deposits far outweigh their debt, lower interest rates reduce total household spending.