PA ANALYSIS: Should the ECB admit defeat on QE now?

As France and other parts of the eurozone return to work after an August on the beach or in the countryside, the focus of investors turns once again to Mario Draghi and the European Central Bank.

PA ANALYSIS: Should the ECB admit defeat on QE now?


The consensus is that the ECB will announce an extension of its quantitative easing programme to beyond the planned end date of March 2017 in place now.

Whether the ECB will do this is certainly a question worth asking but perhaps more pertinently, should it?

There has been precious little evidence that the programme is having the desired effect despite the central bank having pumped out over €1 trillion since the launch in March 2015.  

While European equities were boosted across the board as is virtually inevitable with QE, so-called ‘real world’ impacts have been conspicuous by their absence.

On Tuesday gross domestic product growth for the 19 country eurozone in the second quarter was confirmed by Eurostat to have been just 0.3%. Inflation is close to non-existent at 0.2% and unemployment remains high across much of the bloc.

Aside from the ineffectiveness, there is an argument to be made that the programme is actually harmful in some respects. The vast scale of it has distorted the European fixed income market in an unprecedented way, with the implications not yet fully understood.

Such is the relentless demand for bonds generated by QE that an artificial shortage of some assets such as German Bunds has been created. Yields on some bonds have been forced so low that they do not even qualify for purchase by the ECB anymore.  

The scarcity of yield forces the hands of investors to invest in things they would not choose to under ‘normal’ conditions, and may not fully understand the risks of.

There is also the concern that persisting with QE lets the politicians off the hook in terms of implementing much needed structural reforms, and delays a move to substantial fiscal stimulus which may be what is required to rejuvenate the continent’s economy.

According to senior sovereign analyst at Fidelity International Dierk Brandenburg the ECB has a difficult decision to take.

“The ECB will soon find itself at a crossroads, and will have to assure the market in principle that its QE programme will continue despite the negative side effects on the financial system,” he said. “The lack of available risk-free collateral is the key issue for the bond market.  With EUR 1.2tn EUR worth of government bonds now trading below the deposit rate, and therefore not eligible for the ECB’s PSPP, the ECB has two choices.”