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Since the Eurozone has been at a very low inflation level for quite some time and people have become more conservative in their spending, the issue of pushing the economy up has been raised by the European Central Bank. The ECB President, Mr. Draghi said, “for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms.” Then, a 60-billion-euro-a-month bond purchase program became such a structural reform last week. This blog will examine both the regional and international impacts of this quantitative easing policy.
As a result of this bond purchase program, the Eurozone’s exports will become more competitive worldwide. One of the side-effects of this monetary policy is the weakening of the euro’s exchange rate. European goods become much cheaper and welcome to international buyers. For instance, luxury goods sales campaigns occurred widely across Asia the day following the euro’s drop. Such a move can provide balance to international trade for the Eurozone, but the impact on economic growth may be limited. This is due to the fact that international buyers only consist of a small portion of the total buyers for Eurozone’s exports. About 45% of Eurozone’s exports never leave the currency union. Costs and purchasing power depreciate together, and offset the impacts on the export growth of the Eurozone.
As the euro has dropped with the quantitative easing policy, the U.S. economy is now facing a challenge. The stronger dollar could slow U.S. growth because the U.S. goods and services will be more expensive. While the Federal Reserve is going to increase the short-term interest rate in hopes to raise inflation, the dollar's appreciation will slow down inflation. This gives the Fed some incentive to hold off its plan of raising short-term interest rates.
In all, the massive long-term bond-purchase program will attract more international investments as the euro depreciates, but more international trades do not necessarily turn into economic growth in the Eurozone. The program also challenges the U.S. as it is also tries to recover from the financial crisis.
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