ECB’s QE – another challenge for Europe

The Business Times
View From The Top
Published: 2nd Feb 2015

How effective will the European Central Bank’s quantitative easing be in boosting the Eurozone economy?
What will be the impact, if any, for Singapore business?

WHILE the Federal Reserve’s QE programme is widely seen as a success in pulling the US out of recession, there are manydetractors who argue that the programme had boosted the financial markets but failed to lift the real economy and improve the lives of ordinary citizens. It is the hope that the ECB’s QE initiative will indeed boost economic growth, revive domestic demand and ward off deflatiolation. However, unlike in the US, the situation in Europe is compounded by another variable – the eurozone comprises 19 nations, each with its own set of domestic challenges. The sluggish growth in Europe has been largely attributed to high levels of debt and a lack of competitiveness in some individual countries.

Thus, one of the main concerns is that expanding the supply of money will reduce the incentives for eurozone governments to stop overspending and instead find ways to make their economies more competitive. In particular, it would take reform pressures off Italy and France, for example. It will also fuel asset bubbles as money flows into stocks and other assets instead of benefiting companies and households, as 俄evidenced by the spike in European share prices immediately following the announcement.

In another juxtaposition of the ECB’s QE against the US’s, we see that US companies rely more on capital markets for financing and so central bank purchases can have a much more direct impact there than in an economy financed more by banks, which is generally the case for eurozone countries. Thus, the ECB’s QE may not be as effective as the US’s. Expanding the money supply most certainly leads to a fall in currency valuations. We have already witnessed how the euro has fallen following the ECB’s announcement. This development will be a boon for Singapore businesses that import from the eurozone and a bane for those that export to eurozone countries.

Ronald Lee
Managing Director
PrimeStaff Management Services Pte Ltd

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