The United States, Britain, and Japan all eventually responded to the “Great Recession” with “Quantitative Easing”—central bank purchases of public and private bonds in order to pump money into the economy.[1] Europe resisted this policy[2] and its economic recovery has trailed most other places. The ECB’s goal has been to see an annual inflation rate of 2 percent. It hasn’t worked. In December 2014 the inflation rate hit minus 0.2 percent. Economists feared that Europe would descend into a deflationary spiral. Therefore, on 22 January 2015, the European Central Bank (ECB) announced an initiative to buy 60 billion Euros worth of public and private bonds every month :until we see a sustained adjustment in the path of inflation.”[3]

Will the ECB action be sufficient to propel the European Community on the road to a solid recovery? When combined with the unanticipated fall in world oil prices and a depreciation in the exchange value of the Euro, Quantitative Easing might get the European economy moving. Still, there is a great deal of uncertainty going forward.

At the same time that he announced the program of bond-buying, ECB chief Mario Draghi urged the need for “structural reforms” to create the basis for the “confidence” among investors that is needed to encourage investment.[4] Will European governments be willing to implement such reforms after resisting them for so many years in crisis conditions? Or will they hope that QE can provide enough stimulus to allow them to ignore unpleasant choices? Jens Weidmann, president of the German central bank, worried in public that this might be the case.

How will the ECB initiative affect exchange rates between the Euro and other currencies? The dollar has been rising against the euro and gained another 2 percent after the ECB policy announcement; the Swiss ended their “peg” of the franc against the Euro and the franc rose 17 percent in value in one day. The change in exchange rates will make Euro-zone goods more competitive in foreign markets, but they will make Swiss and American goods less competitive in those same markets. Countries that borrowed in dollars will find it more difficult to repay those loans now that the value of the dollar is rising. In short, it creates a drag on the world economy at a critical time for the recovery.

One thing that now seems impossible to foretell is the effect of important central banks creating so much liquidity. Will it affect the basic stability of the world economy over time? No one is talking about this problem at the moment. They have more pressing business at hand.

[1] In the United States, “QE” pushed up asset prices like those for stocks and homes. This had the unintended effect of adding to the sense of an unequal sharing of the economic recovery.

[2] In large part the resistance stems from people in the northern “creditor” countries who feel that they “were had” by the Greeks and fear that southern “debtor” counties may try to stick them with the real costs of the bail-outs. This feeling comes on top of a long-standing belief that weaker economies suffer from the self-inflicted wounds of overly generous welfare states and a hostility to business.  The complicated governing system for a central bank serving nineteen sovereign states, each with their own central bank, allowed the “creditor” countries to hold the “debtor” countries at bay for years.  Both the emotional and the institutional components to economic policy-making seem incomprehensible to some leading American academic economists.

[3] Neil Irwin, “Fear That Eurozone Stimulus May Be Too Little or Too Late,” NYT, 23 January 2015.

[4] German Chancellor Angela Merkel immediately emphasized this point to the Italians. Dutch prime minister Mark Rutte then piled-on to the same effect. See: Jack Ewing, “Compromise and Persuasion Won Grudging Support for Bond Buying,” NYT, 24 January 2015.