The European Central Bank has opened the money spigot, but it is unlikely to keep the European economy afloat. ECB intervention will not help alleviate what is probably the Continent's most pressing problem: lack of consumer spending and domestic demand. What Europe needs is U.S.-style direct stimulus.
From 2009-2011 Barack Obama dished out $787 billion of federal money to the U.S. economy. This was while the first round of quantitative easing by the U.S. Federal Reserve was already underway.
With interest rates already low, Ben Bernanke's bond purchases pushed credit rates even lower, making corporate borrowing cheap and depressing rates for consumer credit. This is basically the effect Mario Draghi aims to achieve. Not only does he want to shore up European banks' balance sheets to ease borrowing, he wants to revive the entire system of credit and loans, as happened in the United States.
But can the effort succeed without that other important element, the stimulus spending? While Draghi finally pulls out the ECB bazooka to restart borrowing with a bang, he is looking over his other shoulder to see what his European partners are doing.
The answer is, well, nothing, really. And that's worrying. Recently, European Commission President Jean-Claude Juncker brought forth the first-ever pan-European stimulus package, supposedly worth 300 billion euros. This was no bazooka, but Juncker's weapon of choice at first glance appeared to be a pretty decent grenade launcher. On closer inspection, it has turned out to be a well-worn BB gun.
Indeed, the European Commission is not going to spend anywhere near 300 billion euros in hard coin. The actual funds in fact amount to just 21 billion euros - money the Commission scraped together from its own budgets and reserves. The paltry sum is meant to act as a credit guarantor of sorts. With that small amount, and relying on a basket of loopholes and fantastical assumptions, Juncker hopes to entice banks and investors to shell out their own money -- or perhaps Draghi's?
Either way, there is a huge difference between American resolve and European hesitance. Obama's stimulus put money into peoples' pockets, while the Fed showed no qualms about restructuring American banking. Hundreds of smaller, regional banks went bankrupt, merged out of necessity or were bought by their larger peers.
Meanwhile, U.S. consumers deleveraged; American household debt shows a steep decline since 2008. There is no doubt that rock-bottom rates (which allow for much cheaper refinancing) and stimulus spending aided that process. Household debt is holding back consumer spending in many crisis-hit countries, and economic insecurity makes people want to save their money despite low interest rates.
European governments are unwilling to do what is necessary: quicken the pace of deleveraging and boost consumer spending. Politically speaking it is too risky. The Germans, Dutch, Finns, and Austrians do not want their governments to spend a dime on other countries. The ECB is politically independent; it makes its own decisions. So if quantitative easing fails, it will be on Draghi's head.
(AP photo)
