Europe fires up the printing press

The European Central Bank has finally joined the other central banks in launching quantitative easing.

The European Central Bank "has crossed the Rubicon", says The Economist's Free Exchange blog. Last Monday it finally joined other major central banks and launched quantitative easing (QE), intended to ward off deflation and bolster growth.

It will inject €60bn a month into the economy by buying bonds with freshly created money. It plans to do this until September 2016, but will keep going if inflation shows no sign of heading back towards its target of 2%. Prices are now falling at an annual rate of 0.3%.

Previous rounds of QE by the Bank of England and the US Federal Reserve did little more than steady the economy. And it looks as though the ECB may struggle even to match those efforts.

For one thing, as Capital Economics points out, this QE programme is half the size of the UK and US ones relative to GDP, while it is being launched long after the crisis broke. So the boost to overall confidence and inflation expectations is likely to be smaller.

In particular, there is little scope for boosting lending by lowering yields. Eurozone banks are in worse shape than in the Anglo-Saxon countries, so they will be reluctant to lend even if businesses and consumers are inclined to borrow. Spain's five-year government bond yield is just 0.6% but the rate on one- to five-year bank loans for new firms is 4%.

And while QE will weaken the currency, the weak global recovery will keep a lid on export growth. Still, we know that printed cash always finds its way into asset markets. So the ECB's plans are likely to be good for European equities at least.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
No deal is the best deal for Britain – and the EU too
Brexit

No deal is the best deal for Britain – and the EU too

Europe has a lot to gain from a thriving, independent Britain, says Matthew Lynn.
6 Sep 2020
Europe’s magic works better in the dark
EU Economy

Europe’s magic works better in the dark

Europe’s latest fiscal intervention looks like the kind of muddle-through that makes a United States of Europe more likely, says Merryn Somerset Webb.…
28 Aug 2020
The eurozone takes a big step forward towards fiscal union
EU Economy

The eurozone takes a big step forward towards fiscal union

The European Union’s coronavirus recovery plan and its decision to issue joint debt will change the bloc forever.
23 Jul 2020

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020