Taking a page from the US Federal Reserve, the Eurozone’s European Central Bank (ECB) is widely believed to be in the process of putting together a multi-billion euro quantitative easing stimulus package. The hope is that by buying billions of ECB bonds at attractive rates using euros printed out of thin blue air, this will unleash a huge amount of liquidity that can help the broader Eurozone economy. Primarily, ECB planners hope that the flood of cheap cash would be used to buy real estate, invest in businesses, buy corporate bonds, and otherwise engage in activities that would boost the overall Eurozone economy. After all, the current US recovery is regarded by some economists as the result of the US Federal Reserve’s quantitative easing policies. Here are three reasons why the ECB might not get the same results.
Eurozone quantitative easing funds might not stay in the Eurozone
The cash released by quantitative easing doesn’t know any territorial boundaries. Instead of staying in the economy that is supposed to be helped by the cheap liquidity, it can be invested in other markets with higher rates of return. This is precisely what happened with the Fed’s quantitative easing. Emerging markets skyrocketed because investors found better rates of return there.
Cheap liquidity boosts speculation
Extra liquidity boosts equities and bond market speculation since they produce faster returns compared to investing in an actual business at the local level. There’s a lot more risks with actual local business investments while financial market investments can easily appreciate due to the bandwagon effect created by other speculators with extra liquidity.
The eurozone economy is a patchwork economy
The biggest drawback to the Eurozone is that it is a patchwork economy of little fiefdoms. Different local economies, different customs, different mindsets. This is a drag on investor confidence as far as consistent and eurozone-wide results and stability. Even if people were encouraged by quantitative easing to invest, the might restrict their investments to the hot spots of the Eurozone economy while the rest continue to languish.
As you can tell from the three reasons above (the list is actually much longer), there are serious issues regarding the wisdom of the ECB’s purposed quantitative easing plans. Dragging the euro down by flooding the market with cheap money might not produce the expected results and possibly make matters worse.