Careful steps towards quantitative easing

After last week’s moves in the money market, the words on everyone’s lips are ‘quantitative easing’.
Many are wondering why the ECB has been so unwilling to do what the Federal Reserve, the Bank of England and the Bank of Japan have done, quite successfully I would add.

They’ve hinted at it, of course, in ECB President Mario Draghi’s mention of purchasing ‘asset backed securities’, but this isn’t real quantitative easing on the scale seen in Japan, the UK and the US. So why haven’t they initiated a full and structured quantitative easing plan? Because the Germans don’t believe in it.

The German establishment has an instinctive fear of quantitative easing and a sheer loathing of inflation. Printing money simply doesn’t go down very well with them. Their gut hope is that the ECB will be able to do what it did before, provide quantitative easing without ever actually providing quantitative easing.

In 2012 Draghi’s announcement of Outright Monetary Actions (OMTs) in 2012 calmed down the money markets within any bonds having to be bought. It is unlikely Draghi will be able to pull off this trick again. If he wants to unleash the power of QE in the Eurozone he’ll have to do it properly and in considerable amounts.

However the other problem is that the German side of the fence is also, perhaps quite rightly, worried about how buying government bonds would suddenly take the pressure of the particularly heavily indebted Eurozone economies. The lack of bonds on the market was supposed to be one of the main ways to force the Eurozone’s struggling economies back into self-powered growth.

So the ace up the sleeve which would provide the biggest boost to the Eurozone, is essentially being scuppered by structural weakness. Nevertheless, quantitative easing is definitely on the cards, but the real question is, how much will be delivered when it happens? The answer is, as much as possible.

Lloyd Hughes, French Private Finance