THE EUROZONE MIGHT APPLY STIMULUS. SHOULD IT MATTER TO US?

Europe has been in an economic funk for about seven years.  During that time, I have written frequently about it acting more like a country club–with a consortium of central bankers and finance ministers–without ever seeming to take decisive action.  And, as long as the European economy, representing some 25% of global commerce, remains stagnant, that creates a drag on the economies of other nations–including the U.S.

This past Friday, Mario Draghi, the President of the European Central Bank said that it is on the verge of taking aggressive action to stimulate the economy.  With interest rates already near zero, the ECB would implement “Qualitative Easing”–buying ECB government bonds.  That would flood the economy with additional money and, hopefully, promote economic activity.

The immediate result of that statement, as would be expected, was that the Euro dropped to its lowest level since June of 2010.  That’s because a weaker currency tends to discourage an in-flow of foreign capital.

A weakened currency makes export goods more attractive in overseas markets; however, that also makes the import of products, such as oil, more expensive.  But right now, the inflationary impact of higher-priced oil is the least of Europe’s problems.  In fact, with inflation running around 0.3%, their concern right now is with deflation (lower prices).

With the European economy virtually in a shambles–and even powerhouse Germany is barely out of recession territory–I draw your attention back to my earlier comment about Europe not taking “decisive action”.  The ECB’s 25 member Governing Council, will meet on January 22, and there appears to be a majority in favor of implementing the bond-buying program.  It has been suggested, however, that it might wait until the next meeting, in March, in order to persuade the reluctant members from Germany on-board.  You see, German Chancellor Angela Merkel holds all of the cards.

Decisive action?

NOTE: The Eurozone is the 18 member nations of the European Union which uses the common currency, the Euro. Ten E.U. member nations have not joined the Eurozone, and still use their own currencies.  The European Central Bank manages monetary policy for the Eurozone member nations.

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