Can QE save the Euro?

p0510's picture
Rank: Senior Baboon | 193

After sustaining long disagreements with German leaders, the European Central Bank finally announced Draghi’s victory with QE to be launched in Europe. QE in the Euro would witness bond purchases of 60 Billion Euros per month for at least a horizon of 19 months in addition to the existing scheme of purchasing 10 Billion Euros with covered bonds. The programme marked its official debut in Europe on March 9th however the markets had begun pricing in the much anticipated measure sending bond yields falling and average deposit rates hovering around the zero lower bound.

http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/print-edition/20150314_FNC483.png

 The latest feedback from Portugal – a ‘peripheral country’ with relatively wider spreads with 30 year yields touching 2.23% on Friday (03/13/15) - the lowest since 2006. The euro has maintained its decline relative to the dollar and much of it translating to improving stock market performance as the graphic below depicts:

http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/print-edition/20150314_FNC451.png

Despite markets reacting optimistically to the unconventional monetary policy and ECB improving its growth forecast to 1.5% (from 1%) for the Euro zone, the eventual success/sustainability of the results depend crucially on how strongly lower rates trickle down through the financial system and in turn prop up the moribund state of demand plaguing the Euro zone.

One of the major differences between the US and European financial markets is that companies resort to bank loans for primary borrowing purposes in the Euro as opposed to the US where the corporate bond market is very well developed. Thus eventual success hinges on how well the banks are able to stimulate investment by advancing loans to profitable/risky moderate opportunities which are made difficult by the adverse selection problem in the face of a region recovering from recession. Also, with falling bond yields on government bonds created liquidity in the high yield corporate bond markets in the US and thus providing a strong stimulus for investment.

As the Euro weakens (currently almost at par with the dollar, trading at $1.06) it will be important to capitalize on stronger export opportunities to stimulate growth. With exports accounting for a quarter of the GDP in the Euro area, this will be the most important channel to establish competitiveness and stimulate export fuelled growth.

Another area of concern for the ECB could be the fact that the asset purchase program conducted by the FED was at a time when prices were depressed to their lowest levels and interest rates were higher (meaning bond prices lower) and thus guaranteeing profit making opportunities for the US Central Bank. Thus many argue that the missing ‘’shock and awe’’ impact of QE in the Euro zone might trigger capital losses for the national banks. Many analysts are also of the opinion that infrastructure investment would perhaps be a stronger channel for stimulating growth.

However while we wait for the long run trends to emerge, the near future signals an air of optimism. With global stock markets recording a 5.3% increase in February, the world economy posts a favourable outlook so far.

So what are your thoughts and predictions for Quantitative Easing in the Euro?

The content for the blog has been sourced using:

Portuguese Bonds Take Prize in First Week of ECB’s QE Purchases , Europe’s QE Quandary , Getting the machines revving , Mario’s miracle? , The really scary thing about Europe's QE plan

Comments (26)

Mar 16, 2015

Europe needs reform and real structural change. Germany is pissed off with QE. That being said, half the money is being piped into France and Germany. Most of the EU banks are not really fit for lending. Some passed the stress test by the skin of their teeth. It'll buy time and keep EU afloat but it wont solve the problem. Governments really gotta get up off their ass and drive investment and growth. My 2 pence.

Mar 17, 2015

Dunno. Ask Zimbabwe if printing/destroying the value of your currency will save your currency.

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Mar 17, 2015
companion:

Dunno. Ask Zimbabwe if printing/destroying the value of your currency will save your currency.

Yes, the situations are exactly alike.

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Mar 17, 2015

I bet Zimb is happy with the USD currency

Mar 17, 2015
companion:

Dunno. Ask Zimbabwe if printing/destroying the value of your currency will save your currency.

Huh?

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Mar 17, 2015
companion:

Dunno. Ask Zimbabwe if printing/destroying the value of your currency will save your currency.

Not comparable, if you look at it from a historical perspective. Zimbabwe is a tertiary economy. Historically there are numerous examples of tertiary economies that have experienced hyperinflation following printing to pay for government debts. On the other hand the US/Euro are primary economies. There are exactly ZERO historical examples of hyperinflation in a core economy.

Mar 17, 2015
companion:

Dunno. Ask Zimbabwe if printing/destroying the value of your currency will save your currency.

You just won the first ever annual WSO retard challenge. Collect your prize by running into traffic.

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Mar 17, 2015

(Quick aside, you mean "capitalize" and not "capitulate" in the 5th paragraph).

If Europe wants to have any chance of saving the Euro, QE was imperative. The fact that the US is headed in the other direction is hugely important although that could come with another set of credit strains.

Weakening the euro and stoking some inflation are what the euro really needs at the moment. Credit channels need to be fixed in the banking system and QE will provide a much needed breather for the crisis that can help the banking system heal.

Truly saving the euro however will ultimately require political and fiscal integration. That is a thorny subject but Germany ultimately has a whole lot more to gain from it than they would care to admit. If Germany is stuck with an aging population and a painfully high DeutscheMark 20 years from now, there will be plenty of Schadenfreude to go around in the rest of Europe.

Mar 18, 2015

Yes..thank you for pointing out..

Mar 17, 2015

As a European, my bloody MBA just got 50k more expensive over the last three months.

Thanks QE.

Mar 17, 2015

Sorry man, my grad school liabilities have made me short euro the past two years and I'm loving it now.

Mar 17, 2015

Ireland is doing good

Mar 17, 2015

Europe don't have the balls to make any needed structural changes so they just turn the QE dial and pray it works. It is sad to see how slow and backwards the European economic policy is.

Mar 17, 2015
laststance:

Europe don't have the balls to make any needed structural changes so they just turn the QE dial and pray it works. It is sad to see how slow and backwards the European economic policy is.

True, but does the US have the balls to make the needed structural changes? Maybe all of our allies joining China and their infrastructure investment bank and putting some longer-term pressure on the USD as the reserve currency will lead to changes, but I highly doubt it until the shit hits the fan.

Mar 17, 2015
joey joe joe shabadoo:
laststance:

Europe don't have the balls to make any needed structural changes so they just turn the QE dial and pray it works. It is sad to see how slow and backwards the European economic policy is.

True, but does the US have the balls to make the needed structural changes? Maybe all of our allies joining China and their infrastructure investment bank and putting some longer-term pressure on the USD as the reserve currency will lead to changes, but I highly doubt it until the shit hits the fan.

If you could provide specific examples I would appreciate it to help frame the debate.

US has probably the most modern labor economy out there. Instead of turning to unions and the outdated view of stick with a company for the rest of your life,US labor markets are highly dynamic places that fit the changing needs of today.

There are exactly ZERO historical examples of hyperinflation in a core economy.

Post WWI Germany

Mar 17, 2015

What structural changes are we talking about? The biggest mistake Europe has made since the start of the crisis is being tighter than the US and UK when it needed to run the loosest monetary policy of the 3.

Mar 17, 2015
GoodBread:

What structural changes are we talking about? The biggest mistake Europe has made since the start of the crisis is being tighter than the US and UK when it needed to run the loosest monetary policy of the 3.

The European response to the crisis was suicidal, austerity in a time of need? Their monetary policy is 7 years too late.

I am concerned about three things
1. Working Age population is declining. The same worker will have to support more people, I would be in favor of a looser immigration policy.
2. Restrictive Pro-Labor laws. European companies are not competitive globally because their workers work less hours and are being paid more. When the economy shifts, companies have difficulty laying off workers leading to more bloat.
3. Not really structural, but there seems to be an asset price bubble that looks suspiciously similar to 1991 japan. P/L is at a very high level even though companies have a lot of difficulties. Debt is incredibly cheap, people are getting negative interest rates on small business loans. Heck Greek 10 year debt is at 10.8% which is way to low for a country that is almost guaranteed to default.

I am not an expert in the field, these are just my concerns and I welcome alternative viewpoints

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Mar 17, 2015

What laststance said.

They don't seem to have any clue what they're doing, and are just desperately grabbing at straws in the hope that something will work, and the EU will not survive without any structural reform.

I recognize that the guy I'm about to link to isn't too popular on Wall Street, but he's got a very strong track record with his forecasts and I can't find any reason that his assessment here is wrong:

http://armstrongeconomics.com/2015/03/09/can-the-e...

Mar 17, 2015

Only the ignorant view China as some sort of economic panacea. QE isn't addressing the underlying problems in the EU and the fact remains that Greece (for example) can't repay what they owe. It's tough to make predictions but the BOJ started to lose effectiveness once their balance sheet hit 30% of their GDP. In other words this is a temporary measure with diminishing returns.

Mar 17, 2015
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Mar 17, 2015