While bolder than expected, the European Central Bank's (ECB) quantitative easing (QE) package is unlikely to kick-start a recovery in the eurozone. Interventions by central banks need to be speedy, strong and dramatic if they are to be effective. The ECB has dragged its feet for six years over QE, and coming this late in the day the impact will be far less pronounced.
There are reservations anyway about the effectiveness of QE, even when applied better as in the UK and the US. It bails out debtors and raises asset prices but does not automatically lead to increased consumption and investment.
Indeed, the problems in the eurozone are structural and not even a massive fiscal stimulus could resolve them over the longer term. A currency union without a common economic government – common taxes, public debt and spending – is unviable except for small countries tied into much larger ones. Many critics suggest that labour market and public sector reform are the priorities, but even these may not be enough and there is a huge social cost.
The eurozone is a political project that has failed economically and will have to be resolved politically. This is not something that the ECB can undertake. It is a huge challenge, as currently the project in stuck in an uncomfortable middle ground – it cannot move back to national status without huge disruption and there is no consensus for moving it forward to full integration. The ECB's QE programme may help boost exports by lowering the exchange rate, but it cannot resolve the deeper problems.
Brian Caplen is the editor of The Banker.
