ECB Next Week Could Signal More Quantitative Easing in a “Race to the Bottom” Move

A small but worrying story was hidden away at the bottom of page 20 in the Companies and Market section of today’s US print edition of the Financial Times. The title of the article is, “Euro falls after Nowotny inflation comments“. The article highlights the fractured nature, or shall we say complete lack, of global coordination of monetary policy. Nowotny is on the ECB governing council.
It seems that the falling euro has come to a grinding halt, due to the fact that the US Federal Reserve is now signaling a delay in raising short term interest rates. As the Fed, focused on data-ready signals from the US economy, delays rates, so the dollar weakens against other currencies – including the euro. If rates were to raise, the dollar would strengthen. As the dollar weakens, the euro’s fall has slowed, and has even reversed. Logic tells us that as a currency strengthens against its trading partners, exports get more expensive and will thus slow – which in turn will slow the Euro-zone economy.   

The result is an ongoing beggar-thy-neighbor behavior we keep seeing around the world. Somewhere between the US, China, Europe and Japan, we have a distinct lack of mutually reinforcing policy to get us all out of the trap we are in. The article suggests that the ECB may signal an increase in quantitative easing (QE) to help weaken the euro (against the dollar) to promote exports. This would have the consequences of pushing the Fed to (again) keep rates low, or in the worse case re-start QE themselves if the euro move was too successful.  
Our policy leaders are not working together. They are focused on domestic policy (good work, chaps) while being continually buttressed against the response from each others actions. If ever there was a time for a new global collaboration (think Bretton Woods 2.0) then now is the time. The “race to the bottom” we are in is killing us.


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