The impact of QE in Europe
The much anticipated event finally happened in January. Mario Draghi of the European Central Bank (ECB) finally announced the introduction of quantitative easing (QE) in Europe with immediate effect. The figures are big - the ECB will buy back €1.1 trillion in assets, including government bonds and EU institutions, at a rate of €60bn per month.
The size of the programme was somewhat larger than expected and was greeted with enthusiasm by the markets, which rose following the announcement. However some economists have reservations about the effectiveness of QE, whilst others believe it could lead to long-term inflation.
So will QE in Europe work? In the US and UK, QE seems to have been effective, though the results in Japan, which has the largest QE programme, remain unclear. In the US and UK, QE seems to have contributed to rising asset prices and confidence, as well as economic recovery. A recent Bank of England report estimated that the QE programme between March-November 2009 helped to boost the UK's economy by between 1.5 to 2.0%. However, it also suggests QE in the UK did little to increase bank lending.
So what is the likely impact for the Eurozone? The QE programme has been introduced to help alleviate the deflationary pressures in the Eurozone economy. It has already contributed to a weakening in the Euro, and this should in time have a positive effect on the Eurozone economy as a whole. If it acts to boost growth, this would be good news for the global economy. However, one of the key roles of QE is to help build confidence – demonstrating that policymakers are committed to promoting growth, and will do ‘whatever it takes’.
Since the introduction of QE, however, we have seen the anti-austerity Syriza party elected in Greece, whilst anti-austerity parties also seem to be gaining ground in other countries, such as Spain. This could undo some of the good work done by QE.
For investors, the experience of QE to date is that it has usually proved positive for stock markets. As European equities were amongst the worst performers in 2014, investors could hope for a better year in 2015. On the other side, QE usually pushes up the market price of government bonds by increasing demand, which reduces the income available on those bonds.