But to not act at all is perhaps surprising given figures from Bank of America Merrill Lynch that show $12trn of financial assets purchases by the big five central banks contributing to $33trn of fiscal and monetary stimulus which is equivalent to 46% of the world economy.
ECB not on speed
Is the ECB slow to act or does Europe not actually need QE?
"There is some support from the ECB and it still needs to do more," according to Mark Burgess, Threadneedle Investments’ chief investment officer.
"It has provided liquidity but not in the same way as others," he added refering to LTRO, the long-term refinancing operation aimed squarely at European banks.
So while Burgess and others agree liquidity is most definitely needed, QE may not necessarily be the most straightforward answer. Burgess is firm enough in his beliefs to give the soundbite that "large parts of the Bundesbank will die in a ditch before QE is introduced". Even those who are more positive rarely say anything more than "maybe".
Plenty of forerunners
So what QE lessons is the ECB learning from elsewhere?
In April, Japan’s central bank governor Haruhido Kuroda pledged to double his economy’s money supply and buy close to £50bn of government bonds each month for at least two years. The underlying aim is to move away from the deflation that has dogged what is still the world’s third biggest economy for the best part of two decades, targeting 2% inflation.
While it is early days, its benchmark long-term interest rate has reached a record-equalling low of 0% since April whle also spiking at 1%. Rising interest rates will only make its economy worse as individuals struggle to repay their own interest-rate sensitive loans whle the government will be forced to pay even more to finance its own spiralling debt.
The US Federal Reserve is moving in the opposite direction and now that some of its own economic numbers are improving (growth up, unemployment down, banks more stable) Ben Bernanke is talking of reducing the level of its repurchases, currently at $85bn per month, sometime next year if not sooner.
ECB needs a fix
Mark Carney has started in his position of Governor of the Bank of England with a pledge to keep interest rates lower for longer with little talk of doing anything other than keeping QE steady as she goes. Further economic chaos may force his arm but a shift away from austerity rather than economic chaos is more likely.
For all three, QE is a short-term fix so it will end one day. What happens next is still being debated with the only consensus being that any unwinding needs to be orderly, well-managed and clealy communicated well ahead of it being started.
So what is the potential for an ECB-led QE?
Jim Cielinski, Burgess’ head of fixed income at Threadneedle, is more constructive about the outlook for Europe.
"You need a current account surplus so countries don’t have to borrow," he says. "They need to move away from the emphasis on austerity but you’re not going to fix the eurozone until the IMF, Germany etc move away from austerity."
A political solution
For Cielinski, Germany is key to a successful exit from the eurozone mess, saying that if the ECB eases a bit more then it will be a positive for Germany. Given Chancellor Angela Merkel’s re-election will be decided on 22 September, she is unlikely to do anything that will cost her votes and continuing with austerity will likely push unemployment up and therefore lose her votes.
So, back to the question: will the ECB introduce QE or has that ship sailed?
Stefan Isaacs, manager of European credit and high yield corporate bonds at M&G and one of the firm’s ‘bond vigilantes’ said recently: "QE may be some way off, and would no doubt see massive objections from Berlin, but in the same way that the ECB never pre commits, maybe just maybe, QE will be on the table sooner than the market is currently anticipating."
In the short term ECB President Mario Draghi is more likely to use acronyms like more OMT or LTRO rather than QE. As Cielinski says, the emphasis needs to shift away from austerity measures, so the answer to the question is Europe does not need QE though increased liquidity and growth it most certainly does…maybe.
What do you think? Or is it the euro you are more concerned with?
