Can the ECB Really Do Anything?

01/23/2015 12:01 am EST


Jim Jubak

Founder and Editor,

Concerns over the fate of the euro and skepticism over what, if anything, the ECB can do, is the key for the global markets, says MoneyShow's Jim Jubak.

Okay, here, for the week ahead, for the weeks ahead, the real question for much of the global markets, not just for the EuroZone, is the euro. What's going to happen? Does the European Central Bank have any credibility left? Do they have any ability to move the European economy out of, essentially, zero growth or to push inflation higher?

Now, the whole point is that, at some point, the European Central Bank (ECB) is going to adopt something like the Federal Reserve's program of asset purchases. About $600 billion is roughly in the days before the bank is meeting on the 22nd, that's roughly what people thought the bank would do. The question is what's the market reaction to that going to be and what's the economic reaction going to be.

Whether the bank actually moves on the 22nd, which I think is unlikely, or pushes off the action a few months, the real issue is not so much what it does then, but what the reaction is because there's increasing doubts that anything the bank is going to do is going to do much of anything at all.

There's increasing suspicion by economists and analysts that the bank has waited too long, it's going to do too little, and it's going to be too late, and that kind of skepticism about the power of the bank to move the markets is hanging over the European Central Bank, hanging over the EuroZone, hanging over the euro, and, really, over the global economy, because, if you look at recent forecasts for global economic growth for 2015, they're all coming in lower and one of the big drivers of these lower forecasts is what's happening in the EuroZone.

So, for example, on the 20th of January, the International Monetary Fund lowered its forecast for global growth for 2015 to 3.5% from 3.8% and a lot of that was problems in the euro. Now, the thing is that we've established, by looking at what the Fed has done and what the Bank of Japan has done, the Bank of China has done, is that, at some point, cutting interest rates, weakening your currency, lowering rates, really amounts to pushing in a string, that you don't get much in the way of economic reaction to that monetary action and I think that's where the doubts about European Central Bank policy are right now.

The sense that, really, the problems in economies like Italy and France and Spain are susceptible to solution by lower interest rates. Interest rates have come down a long way since the crisis and that doesn't seem to have done a whole lot for growth so the question is what's really the economic problem in those big economies? People say that they need a dose of economic marketplace reform like German did but there's really no sense of that being politically possible in those countries, which are swinging to populist anti-euro by in large parties on the electorals sort of playing field so the question is, if the European Central Bank is the only game in town, can it do anything that makes a difference and, right now, I'm seeing a market opinion sliding toward no it won't and that continues to put pressure on the currency and on stocks and on global growth.

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