The Eurozone’s QE Problem

Over the last couple of weeks, as the Federal Reserve ended their latest round of quantitative easing, there have been many calls about the pickup of the “QE Baton” by the BOJ and ECB. The problem is that the impact of liquidity interventions in Japan and the Eurozone do not carry the same “punch” as was witnessed in the U.S due to differences in economic underpinnings. Furthermore, while Japan can easily implement QE since they are a sovereign currency issuer, the ECB is not and must rely on the generosity of its members.

As I wrote this past Monday, Japan has officially slipped into a third economic recession in as many years despite the BOJ’s efforts to stimulate a return of economic prosperity and inflation. This is not a new problem, as Japan has been fighting disinflationary pressures in their country for the last 30 years as shown in the chart below. Japan’s internal struggle with an aging population, lack of savings and accelerating debt/GDP ratios continue to plague economic prosperity.

Much like Japan, the Eurozone has also become entangled in same “liquidity trap” as member countries continue to avoid making necessary structural reforms to cure their burdensome debt, dependency and unemployment ratios. As shown, the decline rate in economic growth since 2007 shows the real problem. Despite successive rounds of monetary interventions and suppression of interest rates by the ECB, the Eurozone has only experienced fits and starts of declining economic activity.

The ECB’s Problem

As I wrote previously in “The Eurozone Could Be A Problem For Stocks:”

“The following chart of wages, labor costs, and price inflation clearly shows the increasing problems facing the Eurozone economies.”

“The negative feedback loop to the Eurozone economies from declining wages and overall deflationary pressures has nullified attempts by the European Central Bank to spark some inflation across economies. While there is continued ‘hope’ that the ECB will launch further successive rounds of monetary interventions, there is clearly a diminishing rate of return of each dollar spent.”