European Central Bank head Mario Draghi has made it clear that the ECB is playing hardball in its fight to set the Eurozone economy right. It’s a gargantuan fight involving a multi-country economic patchwork that is teetering on a potentially crushing deflationary spiral. Overall economic growth in the Eurozone seems stuck in the neighborhood of a dismal 1%. Unemployment is glued at around 11%. Something, obviously, needs to be done and Mr. Draghi apparently has the political will and backing of enough of the Eurozone’s members to push forth with a daring European take on a page right out of the US Federal Reserve’s game book. Will it be enough? Even if the 1.1 trillion euro price tag of the looming quantitative easing pans out, will this be enough to produce traction on the ground where more people can actually start working and the greater eurozone economy jolted back to vibrant life?
The answer might be found in two places: The USA and Japan. Both have pumped trillions of dollars’ worth of liquidity into their respective systems. However, two different pictures emerge. Japan, after depressing the yen, has yet to see signs of robust economic life. In fact, it is becoming increasingly clear that the Japanese central bank authorities might have continue easing to see some convincing and, most importantly, sustainable effects from all that cheap yen flooding the Japanese market.
The US is often touted as the poster boy of effective quantitative easing. After all, the US jobless rate has dipped to the mid 5% level and GDP has been picking up. However rosy all these indicators may appear, there are serious cracks in the optimistic picture of US recovery. First, most of the jobs being created are low-paying jobs. Not surprisingly, median household income has dipped to pre-2008 levels. Also, there are massive amounts of people who are no longer working and opting to go on the dole or permanent disability. The real test is whether the positive housing figures that just came out are sustainable in the face of the job losses created by the weakening US energy sector.