The world is waiting to see what the European Central Bank (ECB) and the US Federal Reserve will decide this week about actions each may take—either now or in the next few weeks—to boost economic growth and shake off the weariness of the recession.
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They are the world’s two most influential central banks. The markets are beginning to doubt their ability to resolve their respective economic issues sufficiently to give investors the confidence they seek.
Continued austerity demanded by the ECB and the fiscal cliff threatening to throw the US economy back into recession are causing businesses and consumers to clamp down on much needed spending.
Stimulus efforts since the financial crisis of 2008 have caused a cycle of markets surging forward after action was taken, then pulling back again as the short-term effects wore off.
The US financial system has recovered significantly since the crisis but the inability of the economy to spur job growth is keeping the economy from growing fast enough to shake off the European effect.
In Europe, the ECB is facing the same issue the Federal Reserve faced in 2008 and 2009—the undercapitalization of banks. Although there are no fears regarding the survival of the US dollar, the president of the ECB is facing the possible dissolution of the euro.
Europe has the added pressure of rebuilding the confidence of other global markets. Each time the Federal Reserve has acted, markets have been boosted. But the length of the rally grows shorter each time.
Gross domestic product in the Eurozone has not seen growth since the third quarter of last year. Europe’s unemployment rate is growing while the US economy and unemployment rate are improving, just not quickly enough for the Fed to stand still.
Increasingly, markets are looking to policy makers to address long-term structural issues in each economy. The longer these long term issues
go insufficiently addressed, the weaker the effect of short term action is likely to be.