The euro’s runaway liquidity will help to support Asian equity market valuations and will provide the region with cheap finance to underpin its buoyant economies. Europe’s intractable political and economic instabilities will also send trade deals to Asian businesses.
Numbers are showing some of these things already at work. Last Friday, for example, Asia-Pacific’s main equity gauge closed only 5 points below its record-high level reached over the last twelve months. Since the beginning of the year, that index gained 17.3 percent – well ahead of the euro area’s 10 percent (in U.S. dollar terms), despite the 0.05 percent interest rate offered by the European Central Bank (ECB).
The ECB’s stated intention to significantly accelerate the growth of an already huge euro supply will continue to feed carry trades — borrowing the cheap euro to invest in higher-yielding assets – but it won’t do much else. Indeed, as the ECB evidence shows, its virtually free-money policies over the last three years have failed to raise and steady the euro area consumer lending in an environment of high unemployment (11.5 percent at the last count), or to stimulate investment spending at a time of declining aggregate demand and idle production capacities.