Category Archives: ECB QE

29/9/19: Divided ECB

Divided they stand...


The ECB is more divided than ever on the 'new' direction of QE policies announced earlier this month, as its severely restricted 'political mandate' comes hard against the reality of VUCA environment the euro area is facing, with:

  1.  Reduced forward growth forecasts (net positive uncertainty factor for QE)
  2. Anaemic inflation expectations (net positive risk factor for QE), but reduced expectations as to the effectiveness of the QE measures in their ability to lift these expectations (net negative uncertainty factor)
  3. Low unemployment and long duration of the current recovery period (net negative uncertainty factor for QE)
  4. Relative strength of the euro, as per chart below, going into QE (net positive risk factor for QE)
  5. Related to (5), deteriorating global growth and trade outlooks, with the euro area being a beneficiary of the Trump Trade Wars so far (ambiguous support for QE)
  6. Expectations concerning the Fed, Bank of Japan, Bank of England etc policy directions (a complexity factor in favour of QE), and
  7. Expectations concerning the potential impact of Brexit on euro area economy (another complexity factor supporting QE).
Here is a chart showing exchange rate evolution for the euro area, and key QE programs timings (higher values denote stronger euro):

Meanwhile, for the measures of monetary policy effectiveness (lack thereof) see upcoming analysis of the forward forecasts for euro area growth on this blog in relation to Eurocoin data.

12/6/19: All’s Well in the Euro Paradise

All is well in the Euro [economy] Paradise...

Via @FT, Germany's latest 10 year bunds auction got off a great start as "the country auctioned 10-year Bunds at a yield of minus 0.24 per cent, according to Germany’s finance agency. The yield was well below the minus 0.07 per cent at the previous 10-year auction in late May. The previous trough of minus 0.11 per cent was recorded in 2016. Notably, demand in Wednesday’s auction was the weakest since late January, with investors placing bids for 1.6-times more than the €22bn that was issued."

Because while the "Euro is forever", economic growth (and the possibility of monetary normalisation) is for never... 

30/7/18: Burden Sharing, Reforms and Greece

Much has been said in recent years about European reforms, recovery, burden-sharing and Greece. Most of it draws links of causality along the following lines:

  • Greek crisis has been resolved on the basis of the country adoption of European and IMF-structured reforms, and no burden-sharing is needed to make things right;
  • European recovery has been organically linked to European reforms, which include future burden-sharing mechanism; and
  • No burden-sharing mechanism has been deployed during the European recovery period anywhere.
In other words, both, Greece and Europe at large are enjoying an ongoing recovery that has been underpinned by reforms, not by burden-sharing arrangements of any sort.

And yet, contrasting experts reports, Greece continues to provide evidence to the contrary:

  1. European recovery has been asymmetric to the Greek situation, where lack of tangible recovery is keeping the country constantly on the edge of slipping back into 'assisted living' via official external lenders;
  2. The above happened despite the fact that Greece has adopted more 'reforms' than any other European economy; and
  3. The above has happened during the extended period of asymmetric and massive-scale burden-sharing carried out by the ECB via its QE (Greece received no QE benefits, while the rest of the Euro area enjoys huge fiscal support subsidies from Frankfurt).
How do we know this? Why, look at the latest fiasco with Greek bonds (not covered by ECB's QE) in contrast with Italian bonds (covered by QE):

So, about the effectiveness of those reforms,  and no-burden-sharing, then...