European Central Bank Stirs Economy but Not That of the US

European Central Bank

The recent move of the European Central Bank may favorably stir the European economy, but not that of the U.S. The move created by ECB will hopefully awaken the long-time hibernating economy in Europe and deliver more promising results.

For American investors in Europe though, the benefit can be felt when the Continent’s demand for their goods increases as the economy picks up. However, their competitiveness is compromised when their goods become expensive as the euro drops against the dollar.

The euro dropped on Thursday by about two percent against USD, landing $1.14. Analysts expect it will continue to fall.

According to Chief Economist Ian Shepherdson at Pantheon Macroeconomics, when the U.S. dollar is stronger than the euro, most benefited will be the American tourists who are set to visit Europe during spring and summer. As the USD gets more power, spending in Eurozone, or the 19 European countries with euro as the official currency, will be cheaper, such as in hotels and restaurants.

The European Central Bank surprisingly unveiled on Thursday an aggressive stimulus plan which looked like its best and last hope to hold the region for another lost economic decade with its high unemployment, political strains and stagnant growth. ECB’s program goes beyond analysts’ expectations and drew favorable market initial reaction.

Global stocks soared and borrowing costs, especially in Europe, fell. Euro’s value which has already been dropping, dropped another two percent against USD, its lowest since 2003. The European Central Bank’s goal is to increase inflation in the Eurozone and help its exporters become more competitive.

The European Central Bank may stir the economy in Europe, but other than American investors and tourists, it will not move that of the U.S., economists said. It is because exports in the U.S. account only a small share in the American gross domestic product. The major contributors of the U.S. economic output are domestic consumer spending, investment and business as well as federal and local government expenditures.

In 2013 for instance, out of the $3.2 trillion of the total global American exports, only 13.4 percent contributed to GDP. According to the data from the Commerce Department, less than a quarter of that $3.2 trillion went to Eurozone.

The 2008 global financial crisis had countries continuously wrestling with economic weakness by turning into a single tool to fix their respective economy – their central bank’s power to create money and buy bonds to be able to push it into the financial system. The program, which is called quantitative easing, can lower interest rates and strengthen their markets to encourage business investment as well as spending.

The U.S., Britain and Japan have been on that path, while the European Union, which still deals with the limitations from the complex politics of one central bank policy for 19 countries, has its own program. ECB President Mario Draghi said, the bank will buy per month, securities worth 60 billion euros, both private sector assets and government bonds. Draghi pledged they will conduct purchases until they see a sustained adjustment in inflation, so they become consistent in a yearly inflation rate of below two percent.

The European Central Bank may favorably stir its Continent’s economy, but not that of the U.S. However, in the recent World Economic Forum in Davos, Switzerland, a panel commented that a livelier European economy, paired with long-term low oil prices could help rise global economy. Also speaking at WEF, Executive Board Member Benoit Coeure of ECB urged governments to reform the economy as ECB alone cannot create lasting growth. He said the European Central Bank has done its part on Thursday and others have to do theirs.

By Judith Aparri

Sources:
The New York Times
CBC News
BBC

Photo courtesy of Frank Friedrichs – Flickr License

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