As the ECB unveils a massive QE boost for the Eurozone, will this set back structural reform?
Richard Batley, senior economist at Lombard Street Research, says Yes
Without structural reform, successive European Central Bank (ECB) monetary palliatives can only temporarily ease the symptoms of deflation and low growth. They can’t address the causes.
In almost every euro area country, private sector and government debt-to-income ratios are higher than before the financial crisis. Attempts to delever through austerity have made the problem worse, as GDP has declined faster than debt. In America, QE was accompanied by a government fiscal stimulus that supported overall demand. US consumers and companies could use ultra-low rates to reduce debt.
In the euro area, ever lower rates from the ECB are needed just to keep debt levels ticking over amid weak growth – a monetary version of the extend and pretend strategy that has reached its apogee in Greece. Structural reform is badly needed, involving either debt relief for the periphery (best) or German fiscal deficits (less good).
Jonathan Loynes, chief European economist at Capital Economics, says No
There may be concerns that the implementation of QE in the Eurozone will set back structural reform in the region by flooding the weaker peripheral countries with liquidity and artificially supporting their growth rates. But I suspect such concerns are overdone.
For a start, given international experience of QE and the limitations it faces in the Eurozone – not least from a very weak banking sector – the policy is most unlikely to transform the outlook for those countries. So there is no obvious reason why they would decide that structural reform is less pressing or no longer necessary. What’s more, even if QE does boost growth a bit in those countries, that won’t necessarily derail structural reform.
Indeed, reforms are easier to implement both economically and politically when economies are performing well than when they are very weak. Still, it’s worth remembering that structural reforms take a long time to implement, and even longer to bear fruit.