European stock markets are rising again on hopes that the US Federal Reserve will soon initiative a third round of "quantitative easing." This is foolish. QE1 and 2 were hardly models of effectiveness, and the Japanese central bank has amply proven that expanding the money supply, though undoubtedly the right thing to do in a slump, cannot by itself turn things around: the famous "pushing on a string" analogy is, alas, more than just a metaphor. But Europeans seem to like grasping at American straws, while Americans persist in their Lafferish delusion that tax-cutters walk on water. It would be more useful, perhaps, if Europeans could prevail upon their own central bankers to ease up on their side of the Atlantic. The euro is too high against the dollar, and European inflation is too low. The IMF has recommended higher inflation targeting as one way to reduce the danger of overhanging debt, but the cry has gone unheard in the European wilderness. Indeed, continental inflation rates have begun to diverge from US and UK inflation rates:
(Source: FRED CPI data)
Europe needs to raise its inflation rate and depreciate its currency. It can't count on the Federal Reserve.