Time for Europe's own QE

Thu, 2 Dec Pre-Open

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The Eurozone really seems to be going through a mini crisis of sorts. As per reports, the Euro recently fell to a 10-week low versus the dollar and the yen. Not only this, bonds of countries like Italy, Belgium and Spain fell so much that their yields have gone up to record levels.

Apparently, the investors are still not convinced that the European Union will be able to come out of the current mess with its reputation intact. Clearly, the current round of interventions just doesn't seem to be working. Looks like investors want to see some more policy action and that too a pretty big one to come through.

Chances that strong policy response would indeed come through brightened after a statement to this effect by ECB President Jean Claude Trichet.

"Policymakers must assert authority to fight demanding market conditions," Trichet is believed to have said. "Observers are tending to underestimate the determination of Governments", he further added.

So far, the Eurozone has been battling its debt problems with the help of a fund called the European Financial Stability Facility (EFSF). This is nothing but an SPV (Special Purpose Vehicle) formed by the member states in order to provide financial aid to member states in financial difficulty.

The EFSF issues bonds to raise funds needed to provide loans to troubled nations. However, doubts have now begun to creep in regarding the adequacy of this facility. Bloomberg reports that atleast another 100 billion euros should be added to the fund.

There is yet another solution. And it answers to the name of Quantitative Easing. Europe's own QE if you will. As per experts, it is time the ECB takes a leaf out of the books of the US Fed and the Bank of England. The ECB, in effect, buy assets so that cash can be injected into the Eurozone economy.

Such a step though is likely to be met with stiff resistance, especially by the Germans. The hyperinflation of the early twentieth century had wrought a lot of havoc on the economy. Clearly, they wouldn't want to get into any situation that lays the groundwork for a hyperinflation kind of a situation, no matter how remote the risk may be.

Time though is running out and the ECB will really have to be on its feet. Something drastic will have to be done so that peripheral countries like Spain and Portugal do not come close to defaulting on their loans. Furthermore, investor confidence will also have to be restored. It is over to the ECB now.