Larry Summers says he\u2019s \u201call in\u201d for bond buying program, but that quantitative easing on its own won\u2019t save Europe\u2019s economy.<\/p>\n
The European Central Bank is widely expected to announce that it will begin a bond-buying program similar to the what the U.S. Federal Reserve has done with quantitative easing. Many expect QE will generate a huge boost for the European economy, much like it appears to have done in the U.S..<\/p>\n
During a panel discussion at the World Economic Forum in Davos on the eve of the ECB\u2019s QE announcement, Summers threw cold water on what it might do. Summers said that while he was he was \u201call for\u201d European central bankers buying bonds, he thought we should be less optimistic about what economic benefit it might have.<\/p>\n
The main reason that is the case, Summers said, is that longer-term interest rates, which QE is supposed to drive down to spur economic growth, are already low in Europe. Rates were higher in U.S. when the Federal Reserve first started buying bonds.<\/p>\n
Instead, Summers says what Europe really needs is direct stimulus spending by governments.<\/p>\n
International Monetary Fund managing director Christine Lagarde, who was on the Davos panel with Summers, said the prospect of QE is already having positive effects. She said a lower euro will help exports and create jobs. \u201cQE in Europe has already worked in anticipation,\u201d said Lagarde. \u201cLook at the currency.\u201d<\/p>\n
Summers countered that the drop in the currency has yet to produce a real gain. \u201cThat\u2019s why I am worried,\u201d said Summers. \u201cWe have already had an impact, and the economic forecast for Europe has not improved.\u201d<\/p>\n
The weaker euro hasn\u2019t yet, for example, been able to support business in Italy. New orders to industry fell 1.1% in December and were down 4.1% on the year, well below expectations. However, it has helped to turn around business confidence in Germany, which was badly dented last year by the Ukraine crisis.<\/p>\n
The real problem Summers said is that all of Europe seems set on austerity and cutting back government spending at the same time. Summers said that collective belt tightening is going to lead to lower economic growth in Europe.<\/p>\n
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