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The ECB’s Faulty Weapon

Gros, D. (2014) “The ECB’s Faulty Weapon“, Project Syndicate, 07 October.


With inflation in the eurozone stubbornly remaining on a downward trajectory, pressure on the European Central Bank to do “something” to prevent outright deflation is growing. This “something” is usually understood to be massive asset purchases, or quantitative easing (QE). But would QE actually do the trick?

The discussion has so far followed easily predictable national patterns: Creditor countries do not object to deflation, because it increases the real value of their investment, whereas debtor countries’ repayment burdens would grow heavier.

In a closed economy, to every credit there must a corresponding debt. But consider individual countries: some run a large foreign debt, while others maintain a large creditor position.

The United States and Germany are at opposite extremes of the creditor-debtor scale. The US, benefiting from the “exorbitant privilege” of issuing debt denominated in its own currency, has run current-account deficits for more than 30 years. The total foreign debt of US residents (most of which is in US dollars) is above $7 trillion. This implies that any reduction in US interest rates would benefit the country as whole, relative to creditor countries, like Germany, where interest income would fall.


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