The World Overall One Financial | Andrei Wogen | finance.wogen@gmail.com

The ECB and QE: Where the Problems May ResideSo it’s been done. The ECB has joined the rest and introduced full-blown, sovereign quantitative easing. Overall the reaction has been looked upon favorably with the Euro falling (a continued positive development for the Euro Zone countries in many ways) and bond yields fell (what should be a positive development for the lending and banking sector). However, while most everyone is running around cheering the fact that QE has been implemented, I am seeing and sensing some issues that already have and likely could arise. So I will be taking the more pessimistic side of things. (1) Reforms will likely to be slow or none at all — with the introduction of QE, this is a lifeline in many ways to the governments of the Euro Zone as the funds from QE will hopefully be used by banks and other institutions for activity in the business sector and “real” economy. However, to me, the introduction of QE simply gives the Euro Zone nations yet more time for them to do nothing….or very near it. It should be noted though that with the recent banking sector reforms in Italy, this is an encouraging sign that maybe the much needed reforms will be completed despite QE. Maybe….

(2) Negative Rates — this is a concern. If the ECB does in fact buy bonds of countries that have a negative yield, this could technically be seen as them helping to fund governments and this would be a big no-no in the eyes of the QE opponents. In fact, a couple of week ago, an opinion handed down by the European High Court made a point to address and voice their opposition to such actions. Also too, yet another lawsuit is being prepared by a group of Germans to challenge QE and one of their main arguments is that QE “exceeds the ECB’s mandate” and they touch on the funding issue in particular. Now, the one loop hole the ECB could potentially use to avoid this problem is to buy already issued bonds that don’t have a negative yield attached to them but in order for the ECB to reach their target in the amount they are willing to buy (1.04 trillion Euros) they will likely have to buy newly issued bonds with more and more countries in the Euro Zone printing negative yields on their bonds. (3) QE Won’t Work…Maybe — the title says it all with this one. I just don’t have much faith that QE will work this time, in the Euro Zone. Not only do companies not use the credit markets for funding like they do in the US, the fact that the ECB is doing QE now puts them far behind the curve in terms of action and results of policy. At this point, in my opinion, we should be talking about or seeing the ECB getting OUT of a massive QE program, not starting it. This lack of action by the ECB to do something that possibly had the possibility

to provide some positive effects before now, shows that the political divergence between countries in the Euro Zone are very much affecting ECB policy. Not that anyone had any doubt that it wasn’t up till now it’s just that this whole QE thing proves it quite well in my opinion.

Overall then, whether or not QE will work will be interesting to see. If the problems outlined above do materialize though, in my opinion they will very much put into question the effectiveness of the ECB’s newest easing measures and the effectiveness of the ECB as a whole thereby allowing for more economic and political discord. Also too it should be noted, QE hasn’t started yet and is not slated to start until March of this year. Plenty of time then for