Economy Today: Central Banks, Monetary Policy, and the ECB's Announced Quantitative Easing. Part 2

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This brings us back to the European Central Bank's announcement.

As you may know, the global economy is slowing down. The EU is living a time of (likely) cyclical unrest, compounded by political crisis in some countries of the EU, political upheaval in others, nationalism, high unemployment in some nations, and fear of conflicts involving others.

The European Central Bank HQ, in Frankfurt

It is not a recent problem, and the ECB has taken many measures in the last few years that were aimed at expanding the economy and turn things around. In some countries things are turning around and improving slowly, but others are now entering recessions. The Euribor (the EU’s overnight) is at a historical low so low that sometimes it went negative. The reserve requirements are also extremely low. Yet neither of these measures has been able to pump enough funding to the economies to push it on a forward motion.

So we are down to bonds. And because it affects so many nations, the purchase will be immense. Sixty billion a month, to exceed a trillion euros over time.

It is indeed startling. Many worry. How can the European Central Bank simply print a trillion euro and toss it out the window like that? Isn’t the immediate result going to be inflation?

The answer is no. If you think about it, 60 billion a month, divided among all 28 nations of the EU (28, becomes a relatively digestible sum. Not only that, at the end of 2014 the dropping price of oil was the tip of the balance that, for the first time ever took the EU into deflation. Deflation would be one of the EU’s worst problems, as it usually starts the vicious cycle so well described by the political economist and ex-Secretary of Labor Richard Reich in the award-winning documentary Inequality for All. This cash injection is designed to revitalize the European economies and raise prices somewhat, two much-needed results,

The wide-scale printing of money has some analysts, economists and policy-makers worried because it’s an undertaking never seen in the EU. Personally, I see no problem with it if it is managed properly. The Federal Reserve of the United States (the US central Bank) has been using this method successfully for decades, under careful management.

Of greater concern is an economic-political issue created by a sticky caveat introduced by Germany on this cash injection. You see, as I mentioned before, the various countries in the EU are doing better or worse. Not everyone is in crisis, and some economies, as a matter of fact, are quite robust and healthy. One of these countries is Germany, precursor and pivot of most of the astringent cutback measures placed on countries in crisis in recent years. Because monetary policy in the European Union is a shared thing, all decisions made by the ECB have affected all nations equally, until now.

The QE measures approved by the ECB this week state that the bonds and assets purchased by each Central Bank of the EU will not be directed to the ECB as part of a joint debt so that each country assumes an equal responsibility for it. Instead, poorer and more-in-crisis nations will have to eat up the bonds they purchase. This is a measure clear and unequivocally designed to protect the German economy and a measure that last week the IMF openly cautioned against. Because, if the monetary policy of the EU is altered to favor one nation, as happened this week… what will be next?