The European Central Bank (ECB) is now in the process of implementing its own quantitative easing program modeled after what was done in the U.S. and Great Britain. The powers that be believe that the ultra-slow recovery in Euro Zone countries is largely due to not enough lending going on. They also believe that printing more money and flushing the system (a.k.a. quantitative easing) is the solution to the problem.
Here is why it will not work: the basis of any strong economy is not consumer spending; it is supply-side production. What is supply-side production? It is the manufacturers and service providers being able to effectively produce the goods and services people need at a price they can afford.
When supply-side production is hampered by government regulation and taxation, consumers cannot afford to purchase goods and services because prices are too high. They then must borrow more than they otherwise would have for high-ticket items. However, borrowing to spend does not increase production significantly. Rather, it only creates debt that eventually cannot be sustained. This is the scenario we are now experiencing in the U.S. and the same that is happening in the UK.
Europe Can Learn from Us
The fascinating thing about implementing quantitative easing for the Euro Zone is that the ECB has the examples in America and Great Britain to prove it will not work. The economic expansion we have seen in this country since 2009 has been the slowest in the post-World War II era, bar none, and any so-called recovery we are now experiencing is happening in spite of quantitative easing, not because of it. The same can be said of the UK.
In the end, quantitative easing will not help Euro Zone countries. The ECB should learn from our example and concentrate their efforts on the regulatory reforms necessary to make for a more friendly production environment. Boost production and you will boost growth faster and more naturally than any artificial government monetary policy ever could. As a bonus, there will be no need for market correction in the future.
Sources:
- Reuters – http://www.reuters.com/article/2014/12/08/us-economy-global-idUSKBN0JL08720141208
