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Almost everyone expects the ECB to announce a full-fledged QE program at its Thursday meeting; even French President Francois Hollande, who told business leaders on Monday that sovereign bond buying, long discussed, would become reality. Markets expect the ECB to announce 600 billion euros in bond buying, according to a Reuters poll, while economists are assigning a 90 percent probability to QE.
Press reports suggest that the bond buying may be delegated to national central banks, rather than sitting on the ECB’s balance sheet. This tactic in part is intended to blunt criticism of QE from Germany and elsewhere and to dampen any suggestion that bond buying amounts to direct government monetary financing by the ECB. While perhaps offering a polite fiction that the euro project will continue apace, the idea that the risks of QE might not be shared among member states sends an unsettling message.
It is unclear if Greece would take part, a thorny issue given speculation that its Sunday election will set the stage for dickering over debt terms that could end in default or a euro zone fracture.
Indeed while the markets look at the threat of deflation and a recession in the euro zone and take QE as a given, opposition in Germany from the Bundesbank and government is still real.
Many investors took last week’s shock decision by the Swiss National Bank to drop its strict control of the euro/franc exchange rate as confirmation that the ECB would deliver a forceful program, one which would spur too much selling of the euro for the Swiss to handle.
Indeed driving the euro lower is one of the points of QE, as is driving risky assets like equities and corporate bonds higher. To meet those goals, the ECB is going to have to deliver a clearly enunciated, large and detailed plan.
Beyond the issue of the size and composition of the program is whether QE is the right tool for the job at hand. Using a very large screwdriver to cut wood is only marginally more effective than using a modest-sized one.
For QE to work it needs to impact consumption via the wealth effect, as those whose stocks and bonds are made more valuable spend some of the proceeds. That’s almost certainly going to have a diminished effect in Europe compared to the U.S., partly because of a lower propensity to spend asset-based wealth and partly due to the very real uncertainty felt by asset owners in places like Italy and France. As for corporations, they are more likely to respond to government reforms and stimulus than monetary policy. It is very hard to see a capital expenditure boom on the back of QE.