Hoping to stimulate the Euro-zone economy, the European Central Bank (ECB) has announced a much-anticipated round of quantitative easing (QE) which is set to last until December 2016, according to Bloomberg News. This promised monthly injection of $58 billion (50 billion euros) int he economy has rejoiced the markets as European stocks extended a seven-year high.
However, this euphoria is likely to be short-lived. “The real economy is not helped with easy-money policies such as the ECB’s”, says Mark Thornton, economics PhD and Senior Fellow at the Mises Institute in Alabama.
On the contrary, Thornton believes that deflation – a general decrease in prices – is what a free-market economy usually tends towards. “Output increases more quickly than the total amount of money in the economy. Therefore, your dollars can buy more stuff. You see it all around you: smart phones, computers, and widescreen TVs have all improved in quality and have become more and more affordable. You see the same thing in big-box stores”
But while the general public appreciates deflation, huge borrowers like the government don’t, according to Thornton. “When a dollar is worth more, the debtor is actually spending more. That’s why so many governments have kept interest rates low and printed so much money: so the that the actual real (accounting for inflation) amount they pay back is less.
“In short, easy-money policies are a government bailout. It encourages spendthrifts like Greece, who claim to be incapable of cutting their spending. Thanks to the continuous injection of euros they receive, they are unlikely to mend their ways.”
Thorton calls these policies “financial repression”. “Government keeps people from investing — what truly improves the economy — by encouraging them to buy and get loans. This might result in short-term prosperity, as we’ve seen in the early 2000s with the housing bubble.
“But it can’t last indefinitely. That you call it easy-money policy, quantitative easing or economic stimulus make no difference: inflation cannot produce long-term economic growth. It has failed in Japan, it has failed in the U.S. since 2007and it will fail in the EU.”
Then what would be a better solution? “The solution is simple but highly unpopular: balance budgets and pay off debts, proposes Thornton. But with such a high debt burden on their budgets, governments will be slow to move in that direction.”
In other words, don’t expect any long-term economic growth in the Euro zone. On the contrary, be ready for more credit downgrading like France’s, as governments will have no incentives to change their spending habits.