Why Americans should care about ECB strategy
Most Americans probably have never heard of the European Central Bank (ECB), nor are they following the debate in Europe about whether the bank should undertake a massive government bond-buying program along the lines of what the U.S. Federal Reserve did with its quantitative easing (QE) policy.
But according to economists, the impact of the ECB's decision on its own QE -- likely coming on Jan. 22 -- has major consequences for the U.S.
The European Union, which is America's-largest trading partner, is a mess economically. The euro is at a nine-year low against the U.S. dollar. Unemployment in the 19-country region tops 11 percent, nearly double where it is in the U.S. The main stock market indexes in the U.K., France and Germany have underperformed the S&P 500 as investors become unnerved by the potential Greek exit from the euro, among other issues.
"If Europe doesn't grow, than we will grow less," Stephen Silvia, a professor at the American University School of International Service, told CBS MoneyWatch. "Europe is our biggest customer, and you want your biggest customer to make money."
Europe remains one of the largest downside risks to the health of the overall global economy, according to Richard Kelly, the London-based head of Global Equities Strategy at TD Securities. What the ECB chooses to do at its meeting this week "is certainly a decision that is fairly momentous and likely will likely ripple through the markets for the next several years," he said in a phone interview.
Indeed, several U.S. companies have reported soft results in Europe including General Motors (GM) and Johnson & Johnson (JNJ). In some cases, strength in the U.S. economy enabled some American companies to overcome Europe's weakness, but many others weren't as successful. Separately, the International Monetary cut its growth forecast for the worldwide economy as CEOs attending the annual economic summit in Davos, Switzerland, are less optimistic than they were a year ago.
The ECB under the leadership of Mario Draghi is widely expected to announce a bond-buying program this week of around $580 billion (500 billion euros). That would mean concerns raised by the Germans, whose economy is the largest in the EU, about how such a program would be implemented have been addressed.
"But make no mistake, the ECB is more optimistic on the outlook, believes last years' rate cuts and asset purchases will feed through into the economy, and expects the fall in oil prices to be a significant boost to growth," TD Securities' Kelly wrote in a note to clients. "So the ECB's asset purchases are being driven more by a desire to anchor medium- and long-term inflation expectations during a highly disinflationary and uncertain time in which the recovery is extremely fragile. Our largest downside concern for the press conference on January 22nd is actually that because of this relative optimism."
During the height of the recent recession, European governments implemented strict austerity measures amid the meltdowns in some of the EU's weaker economies such as Greece. Although the EU also launched some economic stimulus policies, economists say it reacted too slowly in implementing QE and is paying the price for its slow action.
Investors are worried that Greece might depart the eurozone if the center-left Syriza Party scores a victory in upcoming elections. Party officials, however, have said they want to renegotiate the terms of Greece's debt and have no interest in exiting the euro.
"Obviously, an argument can be made that QE in the eurozone is overdue -- given the prolonged weakness of the economy, the fact that consumer price inflation has been under 1.0% for over a year and is now in deflation and falling inflation expectations," wrote Howard Archer, chief European economist at IHS Economics and Country Risk.
The crisis in Europe shows that in today's global economy, Americans need to remember that no country is an island.