Why Draghi may opt against full QE - CNBC Comment

The ECB president faces political opposition to sovereign bond purchases
As one major central bank – the US Federal Reserve – closes the quantitative easing door, markets are hoping that another – the European Central Bank (ECB) – will throw it wide open again.

Many economists now expect that ECB president Mario Draghi will usher in a quantitative easing policy, involving buying up countries’ debt, early in the New Year.

There is definitely an air that something needs to be done in the Eurozone. Unemployment remains stubbornly high at 11.5 per cent and inflation, at 0.4 per cent, doesn’t look that far away from the deflation danger zone. Two of the currency bloc’s biggest economies, France and Italy, are going to need extra wriggle room to meet their budgetary targets – and even Germany, the stalwart of recent years, looks less confident than for some time.

Yet is QE that something? The most obvious problem with a quantitative easing programme, particularly when it involves buying up sovereign bonds, is the potential political fallout. How can you make sure that you’re not giving some Eurozone countries an unfair advantage, particularly if they have already been helped out with tens of billions of euros in bailout aid during the financial crisis? No wonder Germany’s anti-euro party, Alternative für Deutschland, is causing Angela Merkel almost as much trouble as Ukip is David Cameron.

And can QE really be that effective? In the UK and US, effectively printing money has helped to reduce credit spreads and, therefore, the cost of borrowing. Yet the Eurozone already has low credit spreads and borrowing rates, after a series of actions by the ECB. The gap between the cost of short and long-term borrowing for Germany, for example, is already much smaller than it was in the US before QE was introduced there. If funding does not seem to be filtering through to the real economy, how could the ECB ensure that, by pumping more money into the system, it reached the right places?

Those in favour of adopting QE would argue that, by spreading the risk around in a way that is allowed under the ECB regulations (as QE appears to be), and in ensuring the survival of the euro project, the region as a whole will be better off, no matter what some Germans may think. And frankly, there doesn’t seem much else left to do to stimulate the region’s recovery.

Whether Draghi chooses to nudge the door open for QE this Thursday or not, his task of steering the Eurozone through its recovery looks trickier than ever.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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