Merryn's Blog

Real QE is yet to come in Europe

The ECB’s monetary easing policy is nice for the banks, but it won’t do anything to help the wider economy, says Merryn Somerset Webb.

I wrote here last week that the key question about the ECB's monetary easing was not so much what assets the ECB intended to buy, but who it intended to buy those assets from.

This is key for a very simple reason. If a central bank buys assets (whatever they are sovereign bonds, mortgages, etc) and the banking system is broken, it will make no difference whatsoever to the wider economy. For that to happen, the money needs to be lent out and broke banks don't make loans. The policy transmission mechanism doesn't work.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

If, however, the central bank goes into the market and buys the assets freely there, it direct injects new money into those markets money that then gets passed around.

This is why QE had no effect in Japan, beyond preventing the obvious bankruptcy of the banking system in the 1990s but appears to be having an effect now (in the past the Bank of Japan bought from the banks, now it is buying in the market).

Advertisement - Article continues below

So which is it this time around in Europe?

When I read the ECB's statement, it looked very much as though the plan was to buy from the banks, largely because the market in asset backed securities (ABS) isn't big enough for anything else to happen.

However, MoneyWeek regular James Ferguson, of Macro Strategy Partners, is more of an expert on the inside workings of central banks than I will ever be, so I asked him to take a look too. He has. And he agrees with me.

It appears that new ABS are "to be created for the purpose directly from banks' loan books". This is nice for the banks it helps them deleverage. But it doesn't inject new money, and it doesn't do much for credit easing. Real QE is yet to come in Europe.




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
Government bonds

Keep an eye on Sweden's interest rates

Could Sweden be poised to return to negative interest rates?
31 Jan 2020

Boris Johnson’s big Brexit plan

The prime minister needs to get Brexit done, and get the economy growing – particularly for first-time Tory voters. Can he manage all that while negot…
30 Jan 2020
EU Economy

Investors needn’t fear the rise of Europe’s green parties

Green parties across Europe are finding the centre-right to be natural allies. That will be great for business, says Matthew Lynn.
12 Jan 2020

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020