It is impossible to disentangle the QE-effect from other important policy measures that were taken, like banking sector recapitalising (and stress-testing) and the fiscal stimulus of 2009-10. However, we feel that QE was an important pillar of the policy mix that caused the US to significantly outperform most other regions in the global economy in recent years. In terms of GDP growth, the improvement in labor market conditions and stability in underlying inflation (expectations) none of the large economic blocks in the developed world can match the US performance on these macro metrics since 2009.
The comparison with Europe is especially striking as its GDP is still not back to its pre-crisis level, underlying inflation is at a record low level and inflation expectations are under downward pressure. Obviously it is over-simplistic to blame this all on the lack of QE by the ECB, as the widely applied austerity agenda was at least as much to blame for it. Also, the poor diagnose of the origin of the crisis played a big role, as European policy makers did not follow their US counterparts in the assessment that the core of the problem was a balance sheet recession that followed from excessive credit creation in the private sector. In Europe, it did not take long for policy makers to frame the problem in terms of irresponsible public sector borrowing and lack of structural reform efforts by some part of the monetary union.
That the European diagnose could not explain why apparent supply-side problems had not caused overheating and inflation overshoots before the crisis was ignored. Equally, it was somehow reasoned away that some of the previous public finance “stars” (Spain and Ireland) only got into public deficit/debt problems because of the fall-out from the crisis: the plunge in economic growth and the need to take over huge private sector debt piles to prevent their economic systems from collapsing. Northern policy makers even articulated some sort of moral justification for the hardship that the peripheral countries were undergoing. The policy agenda that was rolled out in the Eurozone in recent years, was often motivated as an inevitable consequence of the perception that peripheral countries had been living beyond their means. That the huge internal imbalances that were created within the Eurozone originated to a large extent by the introduction from the Euro itself had no part in this morality play. The impaired currency union, that all the Northern European policy makers had pushed so hard for in the 1990’s, was never experienced by the North as a reason to share in the responsibility for the problems that the Euro helped to create.
As a result of all this the US was basically faster and better then Europe in identifying the problem and more willing to apply unconventional medicine for an unconventional disease, like a balance sheet recession. European policy makers, meanwhile, remain stuck in their fight against ghosts from the past, with a focus on medical treatment from the 1980’s (fiscal prudence and supply side reform) that has proved ineffective so far in addressing the massive demand shortfall, underutilization of resources and persisted downtrend in inflation in Europe.
Recent rumors on rising resistance against a more flexible and innovative policy approach within the one part of the European policy landscape that was finally adapting to this harsh reality (the ECB under Draghi leadership) sends a clear message on the long road to travel for European policy, to become really effective in fighting the region’s economic challenges. Whether Europe in the end will also take the QE road remains to be seen, but without a more US-like flexibility in thinking and commitment to do “whatever it takes” to reach the desired objectives it will be a long time before Europe can be considered healed.
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