The European Central Bank launched a programme of quantitative easing to the tune of 60 billion euros every month.
The logic appears solid at first – it seems to have worked in America, so why not in Europe?
Because America’s problem was different.
America’s recent crisis was a top-level financial cock-up in an economy that’s otherwise substantially robust. At the micro-level, the American economy is in rude health. It’s dynamic, free and innovative – a well-built machine that needed an injection of dynamism.
But Europe’s problem is structural. It is not lack of liquidity, it is misallocation. A badly-built machine isn’t fixed by turning the dial to eleven, it is fixed by getting rebuilt, and only then, perhaps, given a jolt. Stimulation without structural reform is futile, indeed counterproductive, because it prolongs a dysfunctional state.
Pumping new blood into the veins of a patient with gaping wounds is pointless without first (or simultaneously) closing the wounds.
The problem is that the people responsible for policymaking are the wounds in many respects, with vested interest in keeping structural distortions in place.
That’s also why structural reform, despite being the logical first option, is the last option to be tried in practice, and even then only after everything else – first austerity and now, apparently, stimulation – has failed.
The popular dichotomy between austerity and stimulation is an unfortunate framing of the question – cuts to a bad system are an incomplete solution, and stimulation of a bad system is no solution at all.
The American economy is rotten at the top, but incredibly healthy at the base. Europe no longer has much of a base at all, and is incredibly structurally unhealthy outside a handful of pockets dragging the entire anemic behemoth along – such as the German entrepreneurial Mittlestand, or Northern Italy.
Where the picture of the American financial crisis was a hungover athlete, Europe is a deeply unfit fat man in need of profound lifestyle reevaluation. And QE is giving him a candy bar.
This is fully in line with the traditional European “policy” of wishfully kicking the can down the road. Like previous instances, it will obscure symptoms while deepening the problem.
But correctly matching remedies to maladies is crucial. If you treat diarrhoea with medicine for constipation, you’re gonna have a
shitty bad time.
Imitating what worked elsewhere against a different malady is cargo cult economics, reminiscent of a native shaman watching a western doctor successfully treating a patient, and stealing the bottle of pills to give to his own.
Except his patient had a cold and yours has malaria, Mr. Draghi.