QE2 — a second round of quantitative easing — means that soon the U.S., Japan and Britain will all be busily exporting their deflation, raising the question: Just how much pain can the euro zone take?
If by November we have three of the largest economies printing money and buying up their own debt, the outcome — in fact the intention — will be to drive their currencies lower against their trading partners, opening new international markets for their goods and, by raising the price of imported goods, fighting deflation before its debilitating psychology can take hold.
That is the plan, at any rate, and, unless something else happens, it will force the euro up against all major currencies, including, as it is tied to the dollar, the Chinese yuan. The euro has risen about 9.5 percent against the dollar in the past month, a trend that ultimately will murder European exporters and its stock market.
For reasons of history, society and sheer cussedness, the European Central Bank does not seem inclined to join in, though as usual there is dissension.
Speaking in New York on Tuesday ECB President Jean-Claude Trichet said that the ECB’s own version of QE, buying bonds of euro zone weak links and other liquidity support, will continue as planned at least until the end of the year, at which point, “We will see.” In contrast governing council member Axel Weber, speaking in the same city on the same day, pointedly called for an end to special measures immediately, saying the risks do not justify the benefits.