When, on January 22nd, ECB President Mario Draghi announced the launch of an expanded asset purchase programme, encompassing the existing purchase programmes for asset-backed securities and covered bonds, it seemed that the phase of recovery had finally begun. However, this last action might not be as effective as expected. In order to achieve economic stability, Europe needs to pursue a smart growth objective. To do so, a massive change in the strategies of national public expenditure is required. Without such change, Draghi risks falling short with his bazooka.
All factors lead to one crucial question: How will QE affect real economy? The injection of liquidity through Quantitative Easing is a measure of last resort that has been undoubtedly critical for the US and the UK to save the entire financial system from collapse after the crises of 2008. Instead, the impact that the Programme can have on growth is questionable, as demonstrated by Japan that, after launching the purchase programme, it is still in recession (-1.3% in the last quarter). As a matter of fact, the Quantitative Easing effect on real economy is not so different from the one of conventional measure that ECB has already used, without receiving any positive feedback.
In addition to this, with the ECB already operating unlimited liquidity provision, there is no shortage of credit in the banking system of the Eurozone. The constraints rather come largely from a lack of demand for loans in the Eurozone real economy due to a lack of growth – at least at the costs offered. Banks continue to deleverage and are therefore capital constrained. On top of this there remain a number of risks involved in lending to heavily indebted businesses in economies which are struggling and where the business climate remains complex. This means banks are unwilling to take on such lending or charge high interest rates no matter how cheap the liquidity is.
Besides any opinion on Draghi’s strategy, the main issue is that Draghi’s unconventional monetary policy measures continue to be the only “weapon” that Eurozone has to fight deflation and instability. This leads the debate to a discussion on the amount of medicine to be taken rather than on the nature of the change that Europe and its countries, each with its features, have to face. In this scenario, an excess of available resources may strengthen social models that are unsustainable and slow down the creation of new ones.
As reported at the last ECB press conference:
“In order to increase investment activity, boost job creation and raise productivity growth, other policy areas need to contribute decisively. In particular, the determined implementation of product and labour market reforms as well as actions to improve the business environment for firms needs to gain momentum in several countries.”
In other words, we should stop talking about the bazooka, and start thinking about how Europe, as a Union of 28 different national communities, sees its future.
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