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ECB Surprise €60B QE Package Not Enough, Currency Wars At Play – Davos Conference
Central banks have surprised markets this month, and the European Central Bank was no exception on Thursday announcing a much higher than expected stimulus package for the region. At a press conference on Thursday, ECB president Mario Draghi announced a €60 billion per month QE package in Europe, beginning in March 2016 and running to September 2016. Market expectations, based on leaked ECB documents on Wednesday, sat at around €50 billion.
However, some leading economists, attending the World Economic Forum’s Annual Meeting in Davos, said quantitative easing is not enough to revive the European economy.
In a WEF press release covering a panel discussion on the state of the global economy, famed economist Larry Summers said, “we’re all for quantitative easing in Europe, but it’s not enough.” He added that he expects the stimulus package to be less effective in Europe than it was in the U.S. because of the EU’s significantly low interest rates, and the European banks’ lack of ability to expand money supply to the wider economy.
Ray Dalio, chairman and chief investment officer of Bridgewater, who was also a panelist, said that given current market conditions, central banks have lost their traditional method of stimulating the economy and should consider making fiscal, and monetary, policy work together to stimulate growth.
He added that apart from adopting QE, the ECB should consider a weaker currency as part of the solution to the region’s problems.
“Forceful QE and forceful structural reforms, including currency adjustment, are what is needed,” he said.
Looking to the U.S. economy, Gary Cohn, president and chief operating officer of Goldman Sachs, said that struggling economies are currently in a race to devalue their currencies.
“We’re in a currency war. One of the easier ways to stimulate your economy is to weaken your currency,” he said, adding that if the U.S. economy’s strength continues while other economies continue to weaken; it could delay a Federal Reserve rate hike.
Returning the focus on Europe, Christine Lagarde, managing director of the International Monetary Fund, said that the EU’s progress so far is notable, complementing Spain on its reforms.
“Massive progress has been made in the last five years,” she said. “More progress has to be made in terms of fiscal union and banking union.”
