Seven years after the Great Recession, America's recovery is still a slow and grinding process. But for the 19 countries that use the euro as their currency, things are considerably worse: As of early February, the collective unemployment rate for the eurozone was just over 10 percent. For the hardest hit countries like Spain and Greece, it's still over 20 percent.
So on Thursday morning, the European Central Bank (ECB) decided to step up its efforts.
ECB President Mario Draghi and its 25-member governing council announced the bank's main interest rate will be cut to zero from 0.05 percent, and its bank deposit rate from -0.3 to -0.4 percent. The ECB's quantitative easing (QE) program — which began in March of 2015 — will also be expanded from 60 billion euros a month to 80 billion. And there are a few other gimmicks to offer longer-term refinancing and cheaper credit.
"It's well beyond market expectations and expectations were quite high anyway. He came up with the goods," Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London, told Bloomberg. "It's shock and awe."
Well, consider me neither shocked nor awed.
The announcement may have sent the cloistered and rarified world of financial markets scurrying about, and negative interest rates are certainly a weird new tool whose effects are hotly debated. But these are also extremely small changes: a 0.05 percentage point drop and a 0.1 percentage point drop. It's hard to see how that will spur the necessary shifts in the real economies of the eurozone.
The additional 20 billion euros for QE purchases each month is a bigger deal. But there are problems here, too.
The first is what David Beckworth, a former economist with the Treasury Department, has described as the "gas pedal" problem. As he put it, committing to buying a fixed amount every month is like "taking a road trip and applying the same pressure to the gas pedal regardless of whether one is driving up a hill, down a hill, or on a flat terrain." Right now the eurozone economy is facing a very steep ascent. So the ECB should just stomp on the gas — i.e. commit to doing ever-more QE purchases until the economy hits their target.
In this case, that's an inflation rate just under 2 percent. But it's been tough for the eurozone to reach 1 percent inflation, and the ECB also announced yesterday they don't expect inflation to rise above 1.6 percent even by 2018.
The other problem with quantitative easing runs deeper. Like a central bank's normal operations, QE aims to lower interest rates — just long-term ones instead of short-term ones. But it also aims to buy financial instruments from major firms and institutions and replace them with cash deposits in an effort to increase the money supply.
These are all forms of top-down stimulus: You're either making it cheaper to get loans from rich people, or you're trying to push money into rich people's bank accounts a bit more directly.
It works on the assumption that there's already activity in the economy that rich people would loan to or invest money in; we just need to make it easier for the money to get from the rich people to everyone else. But if that activity isn't there, then it doesn't do much.
Creating that activity requires more aggregate demand: bottom-up stimulus that pushes more money into the hands of everyday consumers. And it's government spending, not central bank monetary policy, that's the key tool for that: Government spending is what boosts checks from the welfare state, hires people directly to do various government jobs, and invests money directly in new infrastructure projects and the like. More specifically, it's government deficit spending, because if you tax as much as you spend, you're not adding any new money to the economy.
Unfortunately, an ideological commitment to austerity still rules among the European governing elite, and they've been cutting their deficits. The ECB itself has been one of austerity's main enforcers, using its monetary power to demand cuts in spending from governments. So while it's nice to see them being more adventurous, they're only being more adventurous within the same old self-defeating framework.
Draghi and the Governing Council could still change course. The ECB and all the national central banks under its purview already have all the tools they need to increase the supply of euros and use that new money to buy up government bonds. They could explicitly say to Spain, Greece, and others: massively increase your deficit spending, use it to rebuild jobs and the purchasing power of your consumer base, and we'll buy all the new debt off your hands so your interest rates don't spike.
That would be real shock and awe.