Easing should benefit

January 31st, 2015 10:37 AM

By Southern Star Team

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Southern Star January 31 2015

MERELY contemplating a trillion euro is somewhat mind-boggling, but that is the amount the European Central Bank (ECB) is planning to spend over the next eighteen months to stimulate growth in the euro economy and to try to fend off the threat of a spiral of deflation.

The plan announced by ECB president Mario Draghi last week will see €60bn per month from March until at least September twelve months – a total of €1.08tr – being used to purchase public and private sector assets, but mainly government bonds, to help ease debt and get more money circulating in the wider economy. Central banks, who will hold the bonds, will pass on interest gained on them to their respective governments and this could be worth up to €500m to the Irish exchequer, which they should spend on generating more economic activity so that the aims of the quantitative easing programme can be met.

But how much of it will filter down to the people of Ireland who have borne the brunt of the cost of bailing out our banks? The bankers are the very people who will feel the initial benefits of quantitative easing with the theory being that this handy form of financing will free up more money for them to lend and help to regenerate economic activity across the euro zone.

All the ECB’s efforts before this to try to inflate the European economy have failed and it is only now that it has resorted to quantitative easing in the hope of doing this, having been held back somewhat by German fears of a spiral of inflation. The strategy of keeping bank interest rates at historic lows did not create any significant uplift, so the quantitative easing was the obvious next step as it had worked well for the United States and the United Kingdom in recent years.

While it has taken a long time for the expected ECB quantitative easing to be put in place, the amount of it is bigger than the markets anticipated and the move has been generally well received by them. Mario Draghi has promised that the ECB will continue with this last-throw-of-the-dice policy until the desired results are achieved.

By effectively printing more money, quantitative easing has already had the effect of weakening the euro against the other major currencies, such as the US dollar and sterling, which will boost exports to countries outside the EU. Ireland should be in a position to take advantage of this because we export most of our goods and services to the UK and US and this should help consolidate our GDP growth rate, which has raced ahead of others in the euro zone.

The weakness of the euro will also serve as a great fillip also for our resurgent tourism industry by offering visitors from abroad even better value for money here. As the attractions of the Wild Atlantic Way continue to be promoted, nationally and internationally, it is hoped that places like West Cork will benefit from extra visitor numbers, thus helping the domestic economy, which is only barely beginning to recover and at nothing like the rate of Dublin and other bigger centres.

The dividends of quantitative need to be spread countrywide, so that rural areas, still in the economic doldrums, can reap some tangible benefits from the recovery. Financing more of the recommendations from last year’s largely not-acted-upon ‘Energising Ireland’s Rural Economy’ report by the Commission for the Economic Development of Rural Areas would be a useful start.

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