World Risk Developments November 2010: Spotlight on QE2, the eurozone and protectionism

The November issue of EFIC’s newsletter, World Risk Developments, looks at the controversy surrounding the US Federal Reserve’s recent launching of a second round of quantitative monetary easing, or ‘QE2’. 

‘The policy is causing disagreement between the US and countries such as China, Korea and Germany wedded to export-led economic growth’, says EFIC’s chief economist Roger Donnelly. ‘The US says two things.  First, it needs to mount QE2 to keep the US economy from sliding into a deflationary recession. Second, it wouldn't need to administer so much monetary and fiscal stimulus to the economy if it could export more; but it can't because many exporting nations intervene in their currency markets to hold their exchange rates down. The exporters respond that they are only intervening in their currency markets to such a large extent because QE2 is increasing hot money inflows into their economies and putting undue upward pressure on their exchange rates. Both sides are pointing the finger at each other.’

The newsletter then turns to the escalating financial problems of peripheral eurozone countries, particularly Ireland.  It notes that the Irish government is in trouble with the bond market again because Irish banks are struggling to raise funds in capital markets and some are also suffering deposit withdrawals. At present, the European Central Bank is providing liquidity support, but doesn't want to do so indefinitely. So Dublin is being pressed to go to the IMF and EU for a rescue package out of which it could lend to the banks and inject further capital into them to shore up their solvency.

‘One good feature of the post-GFC world’, says Donnelly, ‘has been the failure of protectionism to take hold.’ ‘However, a recent report by the WTO, OECD and UNCTAD has warned that 'dark clouds' of protectionism are gathering, because of high unemployment, macroeconomic imbalances and tensions over exchange rates.’  According to Donnelly, the report’s warning serve to emphasise the need for coordinated international action by surplus and deficit nations to rebalance their economies to head off this protectionist threat.

In other stories, the newsletter looks at the outlook for transition economies, a controversial proposal in India for mining companies to share profits with landowners, headaches from hot money inflows for Indonesia, further setbacks to business in Venezuela, and radical economic transformation in Ghana.