ECB: 1, Business in Europe: 0

Yesterday, the European Central Bank (ECB) announced its much-anticipated quantitative easing program. Business in Europe has anticipated this decision since ECB President Mario Draghi promised to do “whatever it takes” to keep the euro intact in 2012. However, FSG is urging our clients to manage expectations for growth in Europe for the next three years. While accommodative monetary action is a good start, it will not cure the eurozone’s economic slump.

Responding to low growth, contracting bank lending, and de-anchored pricing expectations across the eurozone, the European Central Bank (ECB) announced its intent to begin purchases of euro-denominated investment-grade securities in March. This unconventional monetary policy tool, known as quantitative easing (QE) will increase the bank’s private and public sector securities to a total of €60 billion per month until at least September 2016.

The specifics

The bank’s quantitative easing program takes a previous plan to purchase private sector securities and expands it to include sovereign bonds. That said, the ECB’s plan is not limitless. The bank has limited itself to purchasing no more than 33% of any single country’s securities, and 25% of any individual issuance. As relates to Greece, the ECB already holds the maximum amount of Greek securities, and thus cannot purchase more until those securities begin to mature in July 2015. Twenty percent of the additional purchases will be subject to risk-sharing, 12% of which will be purchases of European institution securities, and 8% of which will be held by the ECB.

The good news

The open-ended size and length of the ECB’s asset-purchasing program will bolster confidence in the central bank’s willingness to act, and should help to keep individual government borrowing costs low across most eurozone countries. In addition, a weaker euro should help to improve eurozone exports on the margins.

The bad news

The ECB is doing too little, too late. Monetary policy can lay the foundation for growth, but for faster growth the eurozone will need business and consumer confidence, and for confidence the eurozone will need reforms. In addition, the ECB’s inability to buy more Greek debt before July limits its ability to stabilize Greek government bonds if an anti-austerity government is elected in Greece this Sunday.

The risk factor

Greece’s elections are the most acute risk, as the results of its election on Sunday could accelerate Europe’s slowdown or even prompt the region into recession. However, political uncertainty across all of Europe is high. Higher risk prompts lower demand which worsens Europe’s inflation problem and cancels out many of the impacts that lower interest rates are meant to sustain.

As a result, it will be difficult to determine the trajectory of European economics until after Sunday’s elections in Greece. Unfortunately, even in the most stable scenario, the outlook for business growth in Europe is grim.


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