Bold ECB move impresses markets. How effective will it be in restarting economic growth?

Last Thursday, the European Central Bank announced its long-anticipated quantitative easing (QE) programme, involving asset purchases of €60bn a month from March. This was slightly higher than initial expectations and the immediate market impact has been positive.  The euro has fallen to an 11 year low, broadly as expected. Stock prices rose in Europe and bond rates fell as well, with a narrowing of spreads on peripherals (at least until the Greek election).

This is all good and in some ways shows QE is already working. But much of this is a reaction to the size of the package and may not last. The key question is how effective this move will be in stimulating the economy and what the longer-term impact will be. This could take months to assess, possibly much longer, but it is worth making a few early observations.

The best evidence we have on the impact of asset purchases is from the US and UK over the last 5 years or so.

Most agree that several factors contributed to the “success” of these programmes.

How does the ECB’s effort compare?

  • Scale – in this case the ECB action of €1.1tr is about 7% of GDP over 18 months, not quite as large the size of Anglo-Saxon injections, but close (and this can still be extended of course)
  • Surprise – initial US and UK QE in 2009-10 seemed far more effective than when restarted in 2011 – the ECB has shifted from opposition to adoption in the space of a few months and is delivering more than most expected, so scores well her
  • Support – this is where the ECB plan may be weaker, with fiscal consolidation continuing, albeit at a less severe rate, and little progress on structural reform in the Eurozone, other polices are clearly less than supportive

There is also some concern about the risk-sharing arrangements, which make national banks responsible for 80% of default losses. This compromise shelters German taxpayers from any losses on peripheral bonds, but also creates contradictions that could undermine the policy’s impact. The ECB was content to gloss over this at the launch, with Draghi claiming this was a detail. For him, the policy is a major victory against conservative Central Bank opponents, so this is understandable. But the lack of full risk mutualisation may yet be the programme’s fatal flaw.

What does this mean for European property markets?

Overall, the announcement is probably as bold as could be expected, given the constraints. Measures should help prevent deflation taking a grip in the short-term and this will be positive for confidence and recovery prospects. But they may not be enough to inject the sort of dynamism that has been seen in the US and the UK over the last 12 months.

This means that while investors have already seen immediate benefits from the move, Eurozone occupier markets may have wait much longer.

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