How much longer can the ECB keep telling us that QE has worked?

Later this week Mario Draghi and his colleagues at the European Central Bank Governing Council meet up for a policy meeting. As ever there is much for them to discuss and maybe he will raise a glass of Chianti to the passing of a significant threshold. From the ECB.

Public sector assets cumulatively purchased and settled as at 01/09/2016 €1,001,947 (26/08/2016: €990,807) mln

To infinity and beyond indeed as it now strides beyond the 1 trillion Euro barrier in terms of government bonds purchased. There were attempts to put this in perspective.

Completely useless stat of the day: if you made a €1tn pile of €500 banknotes it would be 1189x taller than the ECB HQ. ( @jonathanalgar)

You would have to complete it before they phase out the 500 Euro note though as using 200 Euro notes would be 2.5 times as hard!

Actually if we put all the QE programs into the pot including continuing ownership of Greek government bonds we come 1.37 trillion Euros. Let us look at what it has achieved as we are now at what we were told back in January 2015 was going to be the planned completion date..

Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016.

Of course the rate of monthly purchases has risen since then ( 80 billion Euros) and the program got extended until March 2017 as the to infinity and beyond theme continues.

Economic growth

Let me use the words of Mario Draghi from the last ECB meeting.

Incoming data point to ongoing growth in the second quarter of 2016, though at a lower rate than in the first quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate pace.

If we also factor in the oil price fall that is not a lot of bank for the Euro area taxpayers buck or Euro. As the program started the Euro area was in the process of seeing economic growth of 0.4% in the last quarter of 2014 and 0.6% in the first quarter of 2016. Of course some in the media were arguing yesterday that such policies work instantly! In reality whilst financial markets can move extremely fast real economies cannot. What we observe in terms of economic growth since has been 0.3%, 0.4%,0.3%,0.6% and then 0.3%. The latter number came with both France and Italy flatlining.

But in a word if you factor in the negative interest-rate of 0.4% and the lower oil price you might say “M’eh”. Or as has already been used in reply to me the word “counterfactual” which of course is the last resort of an economic scoundrel.

Looking Forwards

We got an implied view from the Mario Draghi quote above and he was unlikely to be cheered by the business survey from Markit yesterday.

The eurozone economy continued to expand at a broadly steady pace in August. The rate of increase edged down to a 19-month low, however, mainly due to a weaker rate of expansion in Germany.

Even less so by this bit.

There were, however, signs that the longest period of sustained job creation in the region over the past eight years may be cooling.

Rather than a glass of Chianti he may now want the whole bottle.

While the overall picture is one of steady but sluggish 0.3% growth in the third quarter, the revised figures indicate that the economy is losing rather than gaining momentum.


This is what the ECB is officially aiming at and is the stated reason for the increase in both the term of the QE program and the faster rate of purchases.

until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

There was little sign of this in the Markit survey and in fact there were signs of the opposite.

Inflationary pressures are also cooling amid intense competition,

As the current official consumer inflation rate (CPI) is estimated to be 0.2% this poses a problem for achieving a 2% annual inflation target. In fact even the services sector which in both the UK and US is above the inflation target is not in the Euro area. Via its 1.1% annual rate and 44.2% weighting it is pulling the number higher but even if it was the whole index we would be below target still. Ignoring energy only takes us to 0.9%.

The ECB does not seem to have had much success in creating asset price inflation which of course is the central bankers dream. Yes prices of government bonds have surged and more recently corporate bonds have followed. But equities have dropped back since the initial knee-jerk response to QE which saw the Eurofirst 300 push strongly above 1600. As of this morning it is 1379 and virtually unchanged on a year ago. We do not have a reliable house price indicator for the area as a whole but only Austria and Estonia seem of the individual countries to have lit the blue touch-paper.

What is inflation?

Regular readers will be aware that I like to look into the details and I have found this report from Eurostat. Some of the data is for countries outside the Euro area but look at this.

The price of a cup of coffee was surveyed in 15 countries (Figure 4). 8 countries had prices below 1.15 €/cup (7 Eastern European countries and Italy). Norway had the highest average price, where a serving of a cup of coffee costs 3.08 €/cup on average. 3 other countries had prices above 2€/cup (The Netherlands, Finland and Germany).

Prices so different poses challenges for inflation measurement. Oh and if you are looking for the most expensive prices in Europe you seem unlikely to go broke by just answering Norway!

Government assistance

Usually this is presented for Greece and the ESM loves to tell us how much it has saved Greece. Seldom can a country which has apparently saved so much been in such shocking shape! But let us move to its opposite in Euro area terms.

Between 2008 and 2015, German government interest payments were a whopping €122 billion less than originally planned for. The figure comes from a ministerial response to a question submitted by the opposition Green Party, which Handelsblatt has seen.

They are over playing their hand as other influences ( safe haven status for example) have been at play here but for the last 18 months or so the ECB has been explicitly driving German bond yields lower leading to this.

In 2015, the German government paid €21.1 billion in interest, almost half the 2008 level, when it paid €40 billion.

For some bonds it is now paid to issue as the ten-year yield is -0.07%.

Germany does not help back

The ECB has moved from asking to pleading for fiscal help but Germany shows very little sign of doing so. It ran a balanced budget in 2014 and 15 and now looks likely to run a surplus. The one time it showed a sign of some expansionism was when Chancellor Merkel promised to take in one million immigrants.

The ECB would love Germany to spend some of the money it is saving and indeed in terms of imbalances ( Germany’s current account surplus) you can make a good case for it. Although it would have to continue to break the Growth and Stability Pact rules on national debt as the Euro area contradicts itself.

Also there is a clear and present danger that the ECB may run out of German bonds to buy as the FT points out.

bankers at Citigroup estimate that the country’s entire government bond market will become ineligible for the ECB’s bond-buying scheme by November.

Buy equites?

Bloomberg seems not to have figured this out but there is a clear implication in this point made by Citigroup.

Corporate investment faces a financing hurdle as the weighted-average cost of capital for companies (known as WACC) remains elevated thanks to the stubbornly high cost of equity,

Perhaps the ECB should just buy everything along the lines of “It’s the only way to be sure” from the film Aliens. After all what could go wrong?


As we look back we see a distinctly patchy record. Perhaps the irony is that QE type policies that were for so long criticised for being inflationary have in fact delivered pretty much nothing in that front at least in terms of consumer inflation at least so far. We do see a fair bit of asset price inflation but central bankers call that seed corn for economic growth.

As to economic growth the picture is one of “moderate” growth to use the ECB’s own words. But in the economic world we never get “ceteris paribus” and at the same time there have been other influences which have boosted growth. For example lower oil and commodity prices have boosted real wages and hence consumption and the world economy has grown. Whilst the UK is the current scapegoat of choice via Brexit it is also true that its economic growth since 2013 will have helped the countries that follow its trajectory such as Ireland and Spain.

So a lot of effort for not much and maybe it is an entry in the list of the most expensive PR campaigns in history. Indeed if you allow for the costs of any exit then you may find that the overall impact was in fact negative. On that road to nowhere we will see no exit especially on Mario’s watch.






20 thoughts on “How much longer can the ECB keep telling us that QE has worked?

  1. I am surprised that anybody believes them anymore, the usual old nonsense that is just a cover up for the truth. No doubt we will see our financial media swallowing and regurgitating the PR puff that has been issued.
    Shaun are you the only voice in the wilderness?

  2. Hi Shaun
    i have said this many times before, but there is absolutely no excuse for Germany’s behaviour. Its mercantile policies screw everyone else in the EZ , the weakest the most. And together with China they screw the rest of the world. Yes of course there are overwhelming structural issues in the world’s economy, yes there is rampant feudalism at work, but making matters worse for no advantage to anyone except a very very few German ‘elite’ is their blind adherence to surplus and savings ( national and corporate).

    • It is Germany’s business whether they run a surplus or a deficit. It is worth remembering that the French insisted on currency union from a reluctant Kohl as the price for supporting German re-unification.

      Any other country who doesn’t like economic competition with Germany is free to leave the currency union. The euro is creaking at the seams with economic divergence. The political mantra that the euro is irreversable continues to be tested, including the horrible depression it has created in Greece. Donald Tusk is keen to talk about political determination to make the Euro work, but his words are cheap and Poland’s continued use of the Zloty shows his hypocrisy.

      • Its Germay’s ‘0.1%’ elite who benefit, not the rest of their population. Germany has followed a deliberate policy of wage depression for the majority for the last 15 years. This has produced the national and corporate surplus. There is absolutely nothing ‘good’ about this, unless you like feudalism.

        • Agreed. German voters were given a referendum on nuclear power, but not on their currency. The latter seems much more significant to me. That referendum does not shut down French, Belgian or Czech reactors. Nor does it shutdown archaic Soviet built RBMKs.

          The problem with political denial of voters wishes by all mainstream political parties, is that it gives nationalists a monopoly on questioning the Euro. Also, I see that Marine LePen has 3/1 odds for the presidential election.

          At some point, the elites may get an electoral surprise – in a democracy it is unwise to ignore voters concerns.

  3. sorry Shaun , so think the ECB is planning to buy the entire corporate stock of the UE , like the BoJ is looking to buy all of Japans ?

    this doesnt sound like good governance

    it smacks of Corporatocracy turning into fascism and Dune …..

    economically it will just create a stagnent business sector rife with corruption , too big to fail banks are just the tip.

    its crazy Shaun , were’s the oversight?


    • Hi Forbin

      We are back to who regulates the regulators aren’t we? Meanwhile there are more signs of misallocation of resources. From the Wall Street Journal

      “Two large European companies are set to be paid by investors to borrow, taking advantage of ultralow interest rates spurred by the European Central Bank’s corporate bond-buying program.

      German multinational Henkel AG and French drugmaker Sanofi SA are set to pay a yield of minus 0.05% on new issues of short-dated bonds on Tuesday, according to deal notices released to investors. The fund raising is another sign of how unprecedented monetary policy has turned conventional investment theory on its head.”

      What could go wrong?

  4. Shaun,
    Credit Agricole claiming ECB will have grabbed half of eligible gov. Bonds by the end of 2016 meanwhile with IMF out of the picture they can turn the screws on Greece before then.

    • Hi Chris

      As the ECB chomps on ever more of the Euro area government bond market it will get more difficult for it. For a start the supply of German bunds is running out and so the rules will have to change.

      It was only a few short months ago that it looked like the ECB would approve Greece for its QE program but now it seems to be heading the other way. One more time they are squeezing the Greeks.

  5. Looking ahead if the ECB actually discontinue qe will the euro spike and give all sorts of export problems for Germany. And will that create the inflation they are searching for.

    • Hi am

      The problem for the ECB is that it does not know and as you become more of a control freak that sort of thing bothers you ever more! The same would be true of government bond yields. On that road there is no exit.

      As to Germany even if the Euro spiked it would have to really soar to get anywhere near the Dm would be now.

  6. There is now a much bigger potential problem globally.

    Money velocity, which is very slow, if it picks up with all this liquidity sloshing about, all authorities everywhere will have inflation coming out of their ears.

    Shaun, how can the CB’s quickly pull liquidity out without crashing the banks?

    • Hi Noo 2

      With extreme difficulty as we are in a zone where the weapons are neither calibrated nor have been used for a long time. If we look at the US Fed it has managed a single 0.25% so far and back in the day the ECB managed 2 of them. Does anyone at the Bank of England remember how to raise Bank Rate? I am jesting but there is also some truth there.

      We are told that they could do it by quantity as in withdrawing money, but if that worked we would not have used interest -rates!Imagine if the stock market fell and house prices dropped with consumer inflation chugging along.

      Finally I do not see anyone with the backbone required to even set about the task.

  7. Hi Shaun,

    An excellent summary of one of many Western Central Banks that are all following the same Voodoo ‘stimulus policies’! Japan is the leader of the pack and the others can hardly say give it time and it will work after 20 years of Japanese QE and failure.

    From what I read about the main proceedings at the Jackson Hole coven, sorry conference, there were no fresh ideas on how to get out of the current dead end disaster, with the more radical speakers asking should they be targeting 3 or even 4% inflation? Actually, reaching the current 2% target would be a great start!

    The ECB is just the leader in going to infinity and beyond. The Italian prime minister has ‘gone all in’ to boost his reelection chances, with a debt to GDP ratio of 150% now on the horizon, the latest Portuguese government is spaying Euro’s around like confetti and Greece is Greece. Still I guess once you have worked out your country is going to go bust, you might as well go bust in a spectacular fashion. I’m sure they will try to bail Germany in to save the Euro. The biggest favour Germany could do is to exit the Euro as the new Dm would rise, so their Euro denominated debts will shrink. For virtually any other Euro country leaving the reverse applies.

    With the ongoing Euro car crash, I’m sure it will sort itself out in the end. Stein’s law will prevail.

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