Europe is Preparing for Financial Misfortune

Today Europe including England acted to enhance its existing money supply using quantitive easing and guaranteed bank loans for flailing Euro banks. A large French bank called Dexia SA,  Europe's 10th largest bank by asset size according to Credit Writedowns had trading of its shares halted to protect it from further losses and is in the midst of liquidity problems according to Forbes.

Image source: United States public domain

This occurred the same day the European Central Bank President, Jean-Claude Trichet finishes his term. Moreover, Dexia SA is one of several European banks facing a crisis that was specifically predicted as an increased probability as far back as 2009 in a Bloomberg report and again in 2010 in the Economist.

In times of normal economic expansion these policies would be good because it provides short-term stability while the economy improves. However, the obstacle facing the United Kingdom and the Euro-zone is that the economy is not improving. The Euro-zone economy is  actually slowing according the IMF  and as reported by CNN. 

If the Eurozone's economic growth is slowing, then monetary policy should be aimed at providing both stability and stimulus which is what the recently announced monetary policy is attempting to do. However, both the U.K., The European Union and the European Central Bank have either deficit spending, inflation and debt issues or a combination thereof.  The European Central Bank states inflation rate averages 2.5 percent for European Member States and U.K. inflation is 4.5 percent per Yahoo Finance.

According to Yahoo Finance, the ECB is willing to offer loans to banks under presumably liberal conditions. These loans seem similar to the U.S. Troubled Asset Relief Program or TARP that was implemented during the 2008-2009 credit crisis. The implication appears to be Europe's banks are in big trouble and are about to take a lot of asset write downs, in part linked to and foreshadowing a Greek debt write off. 

Printing £75 billion and expanding the ECB's balance sheet by €40 billion is betting that providing stability at the expense of inflation will boost economic recovery enough to repay that debt later. It is a risky proposition for Britain's central bank to print money when inflation is already high and for a debt laden ECB to add to that debt when it is potentially heading into a recession.