The issue with an European Quantitative Easing

Posted: January 13, 2015 in Uncategorized

The biggest issue with Quantitative Easing (QE) in Europe is that in reality this is a political decision and not a monetary decision like in the USA.

Let me explain.

The decision of enact QE in the USA was taken by Federal Reserve, which is technically independent from the political establishment.

The decision to enact QE in Europe by the European Central Bank and its Chairman Mario Draghi depends instead by the agreement of different political states.

Specially the Germans are opposed to a broad based QE, as it would unravel the fiscal discipline imposed on Southern and Eastern Europe. Moreover also between the proponents there are different position as France and Italy are advocating more a fiscal stimulus than a monetary stimulus which, as in the US, would benefit more the share market than the real economy.

Mario Draghi has been a master in being able to talk to the market without actually doing anything.

In 2012 he calmed the markets just saying that the ECB would do whatever it takes to save the Euro. Now everybody expects the 22 January speech in which probably he will hint to a full blown QE in 2015 (and that is why the Euro dropped and the bond yield in the European periphery are so low) – again he will say the right words to sooth the market.

The issue is that internal cables show Mario Draghi’s frustration with the Germans (I read one and it say “they just know how to say NEIN”). So the issue is what happens when the markets will understand that Mario Draghi is bluffing – not because he won’t…but because he can’t do QE.

Even if it is complicated, you can see that the enactment of a European QE is a much more difficult proposition than in the US, even without going into the details of which bond to buy (and that is another, more technical, issue).

This situation is actually a win-win as a lower euro is a positive ( the US imports just 13% of the GDP so it is not an issue , while for example Germany imports almost 50% -most of which is energy which fell more than the Euro) and low bond yield allows the Southern Europe States to refinance their debt easily.

Until the market believes the European QE is going to happen, all shall be good.


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