"European Policy Makers Should Study Their Peers"

           "European policy makers should study their peers," says The Economist because in recent years America and Britain have handled the economic crisis much better than Japan and Eurozone. America and Britain have taken two very crucial measures to stabilize their economies; they have deployed unconventional stimuli such as quantitative easing (QE), and used "forward guidance" to ensure markets they will not raise interest rates too quickly. Such stimuli have warded off deflation despite tight fiscal policies, and kept inflation at a reasonable 2%.

            Although the European central bank (ECB) reacted well to the global financial crisis initially, it has slacked off as of recently. Its main mistake has been underestimating the threat of deflation. Instead of introducing methods such as QE, the ECB has raised interest rates to fend off non-existant inflation threats. This mistake has caused inflation to drop to a low of 0.4%, far below Eurozone's target of 2%. Unfortunately, this low inflation has caused businesses, households, and governments to slash spending in order to fend off debt burdens. 

         However, there are reasons as to why the Eurozone has had troubles recovering from the financial crisis. Unlike its peers , the ECB lacks political support for QE, and Germany's influential Bundes Bank is quite against it. Similarly, many of the Eurozone's problems such as excessive regulation, burdensome taxes, and rigid labor markets aren't even results of monetary policy.

         So what does this all mean? Well in a nutshell, the Eurozone needs to be bold and take action just as its peers have successfully done. However, the ECB is very concerned with inflation rising and that is why no drastic moves have been pursued. If the ECB were to use Japan as a model it could possibly make a positive impact. However, this would require more support, political support, and rhetorical commitment in order to jolt the country and its mentality out of deflation.  

From "Be Bold, Mario," an article in the August 23rd edition of The Economist