ECB Euro QE Won’t Succeed
The European Central Bank (ECB) leaked the information beforehand to test the waters and this time followed through on their promise: Money printing galore in the form of 60 billion euros per month ($69 billion).
ECB president Mario Draghi has been talking about it since 2012 and now finally got the go ahead to boost the ECB’s balance sheet from a measly $2.6 trillion by at least another $1.15 trillion by September of 2016. The Fed’s balance sheet is $4.4 trillion.
What do they want to achieve with this? Inflation (ever hear anyone complain about falling prices?) and economic activity. The old argument for QE, which was to calm financial markets, is clearly not needed anymore as volatility for pretty much every asset class on the planet—apart from oil—is at an all-time low.
But are they going to succeed? And how are they going about it? Let’s look at the second question first.
In the United States the whole process was straight forward. First, the U.S. government issued debt—and it issued a lot during the course of the three QE programs—then it sells this debt to banks and receives bank credit or electronic money for it. The banks then flip the bonds to the Fed for cash reserves and the government spends the money on transfer payments.
This type of money printing results in a minor push for the economy through government spending, drives down bond yields, and pushes up asset prices from real estate to stocks. Although not really sustainable or productive in the long run, the short-run effects in the United States were positive.
No Debt No Success
The Europeans probably won’t be as lucky. Most of the bonds will be purchased by national central banks, such as the German Bundesbank—yes, they are still around! According to the ECB press release, the national central banks, including the German one, will mostly buy their own national bonds.
This is a problem because nobody in Europe, including Greece, which is excluded from the QE program, is issuing a lot of debt. So when the Bundesbank buys German debt, it will just buy it from banks for cash reserves at the ECB.
The banks don’t need the reserves because they are not lending anyway and they still get more return for a German 10-year bond than having their money stashed at the ECB. But even if the market sells to the ECB, no new electronic or credit money is created, so there won’t be any effect.
Italy, France, and Spain will probably issue a little bit of new debt because they are still running deficits, but because of Europe-wide austerity programs, the effect will be minimal.
The same goes for European Institutions like the European Investment Bank which might actually issue new debt and spend the money it gets. However, these purchases are limited to 12 percent of the program, so again the impact will be limited. Because not much new money will be created, even the impact on stocks and real estate will be limited.
Of course, as for stimulating private sector economic activity, Europe will do even worse than the United States. Lower rates on this side of the Atlantic inspired shale producers to load up and start new projects, which might otherwise have been unfeasible. However, there is no shale revolution in Europe and the private sector, including banks, sees more risk than opportunity.
The only thing the ECB achieved—but didn’t officially state as an objective—was to devalue the euro by a whopping 18 percent since March of 2014. This helps exporters, especially in Germany, and makes imports more expensive for consumers throughout Europe, not the inflation of the pleasant kind.