Quantitative easing needed but not enough: leading economists

Experts say the measure is unlikely to be effective in Europe as it was in the U.S.

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Europe needs quantitative easing but that monetary policy alone will not restore economic growth and much reduce unemployment, global business leaders told the World Economic Forum in Davos on Thursday.

“We’re all for quantitative easing in Europe, but it’s not enough,” Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University, USA, said.

Summers said that quantitative easing was likely to be less effective in Europe than it was in the Unites States since Europe already has very low interest rates and European banks are less able to transmit monetary expansion to the wider economy. Summers urged Europe to embark on fiscal stimulus and said that “deflation and secular stagnation are the risks of our time.”

Gary D. Cohn, President and Chief Operating Officer, Goldman Sachs, USA, said that the U.S. economy is strong but weakness elsewhere would make it hard for the Federal Reserve to raise interest rates.

He noted the dollar’s strength, which could slow down on the U.S. economic growth, would also encourage U.S. monetary authorities to keep rates low.

“We’re in a currency war. One of the easier ways to stimulate your economy is to weaken your currency,” he said.

Ray Dalio, Chairman and Chief Investment Officer, Bridgewater Associates, USA, said that a weaker currency has to be part of the solution for Europe’s problems, given many European countries’ lack of competitiveness.

“Forceful QE and forceful structural reforms, including currency adjustment, are what is needed,” he said.

He expressed concern that with interest rates at or near zero, central banks have lost their traditional method for stimulating economies. Fiscal policy now must work together with monetary policy to stimulate growth. “Monetary policy that helps fund deficits, that monetizes the deficits, is a path to consider.”

Dalio added that “Spain has done a wonderful job with structural reforms. It is a model.” He noted that the fastest growth often comes from countries that successfully implement structural reforms, such as China in the recent past.

Christine Lagarde, Managing Director, International Monetary Fund (IMF), also complimented Spain on its reforms.

“Massive progress has been made in the last five years. More progress has to be made in terms of fiscal union and banking union.”

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