The €400bn question: Will the Eurozone go for QE?
A Eurozone quantitive easing (QE) programme is now anticipated by BNP Paribas, one of France’s biggest banks. It follows Fathom Consulting, which has been suggesting a similar scheme since January.
BNP Paribas suggest the programme would be around €300-500bn (£246-410bn) – small in comparison to schemes in Japan, the UK and US, but a major step for the European Central Bank (ECB), bound by the political concerns of a multi-national union.
Both organisations agree that the ECB should aim for German bonds, with BNP Paribas saying that capital-key weighted purchases would achieve this, as over a quarter of a Eurozone QE programme would be distributed to Germany. It lays out what a €400bn QE policy might look like.
BNP Paribas suggests that German debt should effectively be removed from the market: “The ECB would push investors into other assets, which would probably lower risk premia.” Fathom Consulting also “see great merit in a programme skewed towards outright purchases of German government debt.”
The cases made for QE
Terrible nominal growth
Even assuming that the natural trend growth is quite low, with real GDP growth of 1-1.5 per cent, and inflation of 1.75-2 per cent, this would imply 2.75-3.5 per cent nominal GDP growth. If the Eurozone had grown at such a rate since 2009, BNP Paribas shows that output would have been €475-760bn higher.
Debt sustainability
Fathom highlights the fact that below-target inflation will make servicing debt, not just for small peripheral economies, but for some of the union’s largest nations.
It does not take outright deflation to pose an existential risk to the single currency. Current market pricing suggests that Italian inflation is expected to average 0.6-0.7 per cent over the next three years. If realised, that would be sufficient to put Italian debt, as a proportion of Italian GDP, on an unsustainable path.
A €1.6 trillion money supply shortfall
Eurozone money supply growth is now by far the lowest of the largest advanced economies.
The growth rate in M3, for example, has been running below (generally well below) the ECB’s former reference value – of 4.5 per cent year on year growth – since mid-2009… In the period from mid-2009 to end-2013, the cumulative increase in M3 should have been in the region of 20 per cent, on the basis of the former reference rate. In reality, M3 rose by around four per cent. The implied shortfall equates to around €1.6 trillion, or some 17 per cent of GDP.
Similarly, the ECB’s balance sheet has actually fallen considerably, dropping even further as a portion of GDP, back towards levels last seen before Draghi was governor.
