The market is expecting confirmation of a quantitative easing (QE) plan from European Central Bank (ECB) president Mario Draghi very soon.
Indeed, CNBC learned yesterday that the ECB will more than likely base its highly-anticipated sovereign bond buying on the size of contributions made by national central banks. But whatever form it takes, it will almost certainly be the most inefficient bout of QE seen by global markets since the onset of the financial crisis.
We already know that yields in Europe are extraordinarily low, and that these have not yet fed through to the broader economy. Further, whether based on gross domestic product (GDP), bond market size, central bank contribution, or sovereign rating, bond buying will be focused towards the core of Germany, Italy and France. This will likely have little incremental effect in spurring consumers and firms to borrow.
We won’t know if U.S. QE worked for at least another few years. If – and I stress if – it did, it will have been because it Fed through to companies due to a well-developed bond market, and because the U.S.’s consumption-led economy has strong multiplier effects. It is unlikely that the ECB’s bond-buying program will be so lucky.
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