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David Brown

The European Central Bank's move to cut euro-zone interest rates to record lows falls well short of what is needed to get the economy back on its feet - full-blown quantitative easing.
Urgent action to boost a flagging recovery and beat deflation is the only way for the euro to avoid a painful endgame.
The latest easing is another bad policy miscue from the ECB. A rate cut worth 10 basis points and a modest €400 billion (HK$4.2 trillion) of extra liquidity are, at best, tinkering at the euro zone's monetary margins.
Former United States Secretary of the Treasury Henry Paulson once famously quipped that "if you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka, and people know you've got it, you may not have to take it out".
Unfortunately for the ECB, that "first-strike" deterrent has long gone and it has repeatedly missed every opportunity to show it had the wherewithal to act - and the willingness to do so.

Since the global financial crisis first broke in 2008, ECB policymaking has failed on all counts. Weak growth, too-low inflation and record-high unemployment stand as testaments to the central bank's policy failings.
Indeed, the problems are still mounting. The euro zone is struggling to break free of two deep recessions, inflation at 0.5 per cent is within a whisker of deflation, while domestic credit contraction, deep fiscal austerity and the ultra-strong euro pose considerable headwinds to sustainable recovery.
The ECB has steadfastly resisted the killer-blow policies employed by its Group of Seven central bank peers to beat recession, mass unemployment and deflation. History could have looked a lot different for the euro-zone economy had the ECB been a lot bolder in the past.
The US Federal Reserve and the Bank of England were revolutionary in using unconventional policy tools to stop impending financial market Armageddon. They threw everything bar the kitchen sink into recovery. And they did it quickly. Interest rates were slashed to zero. The money-printing presses worked overtime to finance a spending spree on government and private-sector paper. Financial markets were plied with the resulting surfeit of liquidity. The Fed and the Bank of England both talked their currencies radically weaker.
The US and the British economies have both ended up on much better footings. Economic confidence is rebounding. Inflation expectations are rising. Job creation is surging. With underlying growth moving upwards of 3 per cent in both economies right now, the stage is set for the US and Britain to return to higher interest rates ahead.
Right now, the ECB needs to throw caution to the wind. It needs to go for growth. It needs to embrace inflation. It needs a much weaker euro.
But while quantitative easing may be the central bank's last chance of success, the delay in implementing it means the outcome is far from guaranteed.
Distressed, cash-starved euro-zone economies such as Cyprus, Greece, Ireland, Portugal, Spain and Italy will clearly relish quantitative easing. They are in desperate need of the extra stimulus from cheaper money. Deepening voter discontent was in clear evidence at the recent European elections. Political rancour is rising.

	Quantitative easing might end up deepening the euro zone's economic and social divide
Last week, ECB president Mario Draghi intimated that the rise of eurosceptic parties at the European elections would have a bearing on future policy responses. This "political" message is unlikely to go down well with monetary hardliners in Germany's central bank. Bundesbank hawks remain highly hostile to quantitative easing.
Germany does not need any more monetary easing to lift growth. Many economists argue that German industry is not only growing too quickly for its euro-zone partners, but expanding too fast for its own good. Negative interest rates simply thrust more fuel into Germany's turbocharged growth.
But with the rest of the bloc struggling so badly, embracing quantitative easing is the only option left. That means the euro zone's rich economies will get richer and the austerity-bound poorer countries, especially those facing costly bailout paybacks, will get relatively poorer.
Quantitative easing might end up deepening the euro zone's economic and social divide. Political cohesion could be compromised even more, putting longer-term euro-zone survival at risk.
This is a real Catch-22 for the euro. Doing nothing more and avoiding quantitative easing altogether would hit the single currency hard. Recession and deflation would follow in quick pursuit. Meanwhile, the currency debasement triggered by an easing programme is an inevitability. A return towards parity with the US dollar is on the cards.
The speed of the fall and the policy action - or inaction - that triggers the decline is crucial to whether investors retain confidence in the currency or not. Caveat emptor conditions would apply - "let the buyer beware".
David Brown is chief executive of New View Economics


Euro endgame

Illustration: Lau Ka-kuen

Mario Draghi

Business

Economy

Global Economy

For the euro zone to recover, the central bank has one last option - engineer a full-blown quantitative easing programme, and act quickly


The European Central Bank's move to cut euro-zone interest rates to record lows falls well short of what is needed to get the economy back on its feet - full-blown quantitative easing.


Euro endgame

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}For the euro zone to recover, the central bank has one last option - engineer a full-blown quantitative easing programme, and act quickly

For the euro zone to recover, the central bank has one last option - engineer a full-blown quantitative easing programme, and act quickly