Quantitative easing comes to Europe

The most interesting aspect of the 750 billion euro ’shock and awe’ stability package outlined by European ministers today is that the ECB is now going to be purchasing Euro government bonds.

This is a turnaround for the ECB, which said only last week it would be doing no such thing!

No wonder markets were caught on the hop. (Though some may say it’s hardly cricket to say one thing then do the complete opposite the very next week).

So, is this Eurozone quantitative easing, Bank of England style?

Not exactly. The ECB is saying that the bank’s purchasing of troubled bonds will be ‘sterilized’ by selling other assets that it owns. This differs from the Bank of England’s approach, which has seen entirely new money created and injected into the economy.

But I wonder how long the ECB’s approach will last.

The stability fund means Euro zone government debts will surely be repaid in the medium term – the immediate liquidity crisis is over.

But it doesn’t make Greece, Italy or Spain any richer overnight.

Ultimately, as with the UK and America, it’s hard to escape the conclusion that inflating away the worst of Europe’s liabilities will be politically tempting. The result could be higher yields on even German government bonds and a weaker Euro in the long-term.

That could be good for German and French exporters – and their stock markets – which may help the Eurozone balance its books. But long-term higher yields won’t help the Spanish or Italian economies, let alone the Greeks.

And closer European integration to justify support for the peripheral countries – or else eventual ejection of the weaker members – now seems even likelier to me.

Tagged as: euro, greece, quantitative easing