Guest blog: Daniel Dennis on Eurozone QE

Below is an opinion piece by Daniel Dennis, a Leaving Certificate student at Glenstal Abbey school. It's also the first guest post I've ever allowed in 9 years of writing this blog. Have a read, this chap has a future in economics if he wants one.

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Argument in favour of QE for the Eurozone

“The problem with QE, it works in practice, but it does not work in theory” said Ben Bernanke; the outgoing chairman of the Federal Reserve at the central bank of United States earlier this year.

In practice, the idea of QE (quantitative easing) is rather new. It was first tried by the Japanese central bank in 2001 and has seen positive results and has been employed by many central banks around the world in light of the Great Recession and again, has seen positive results.

It’s an unconventional method by which a central bank prints new money that has not existed before and uses it to buy bonds or other financial assets which increases their value, reduces their yield which increases their monetary base. The goal is to stimulate the economy where other methods have failed, such as lowering interest rates.

For the past few months, the inflation rate in the Eurozone has been dangerously low. In Ireland, inflation currently stands at 0.3%. This is far below the 2% target set by the ECB (European Central Bank.)

It is clear that the current policy of keeping interest rates low in the Eurozone is not working. There are cases where they are in negative figures, which has resulted in economic stagnation and there is no apparent sign that this will improve. In the majority of cases, deflation is not good news and it certainly will not be good news for the Eurozone. It reduces consumption, discourages investment and increases the debt burden, which is already high for many EU countries, particularly the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries.

Alternatively, the results of Quantitative Easing in other countries have been very promising. As of August 2014, Britain, which was very badly hit by the Great Recession, is the fastest growing economy in Europe. Its economy has returned to the same size that it was at pre-recession levels.

The longer we wait the more damage we do to the Eurozone. With the status quo, the Eurozone will descend back into recession and reverse the improvement that we have seen in the latter part of 2013 and 2014.

Of course, there are arguments against QE. Some say that the money that banks get will not actually benefit its citizens and it will be used instead to invest in developing nations. A report issued by the Bank of England stated that QE has in fact mainly benefited the wealthy thus leading to greater economic inequality. It also has the potential to harm pensions and savings.

However, the Eurozone needs it to discourage saving and encourage lending which won’t happen because of its low inflation rate. SMEs in particular are suffering because banks are refusing to give them credit, which is strangling growth.

The Eurozone has no other options but to consider putting QE into practice. It must act now to prevent the damaging effects of deflation.

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