European Watered Down QE Might Be Inefficient

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.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza