The European economy is in an epic depression. With industrial production stagnant, mass unemployment showing no signs of abating, and inflation on a severely downward trend, economists such as The New York Times' Paul Krugman are concerned that Europe is becoming like Japan, the former second-largest economy in the world, which has spent more than 20 years in a deflationary depression.
But now the European Central Bank — which has a mandate of 2 percent inflation per year, something that even with interest rates close to zero it has not been achieving — is finally going to do something about it.
ECB chief Mario Draghi announced today that starting in October, the ECB would be purchasing asset-backed securities in order to try and reinvigorate the European economy. The ECB may not be calling it quantitative easing (QE), because it is not quite the same as what the Fed has been doing — the Fed's QE plan involves buying both asset-backed securities as well as U.S. government debt in order to buoy the economy— but it is a start.
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The real question is: why now? After all, earlier in the summer Draghi was quoted as saying that he believed that the European recovery remained "on track."
The answer may be that Germany, the economic superpower at the heart of Europe — which is now on the brink of a recession — has finally been shaken. Germany has been strongly opposed to quantitative easing while other eurozone economies such as Spain, Greece, Italy, and Portugal struggled, with Chancellor Merkel remaining adamant that structural reforms, such as government spending cuts, are the right answer for those countries' woes. But now that the contagion has spread to Germany, things are different.
