The ECB has little choice, confronted as it is, with the awesome prospect of increasing instability. So far, it has run a pocket QE that has blatantly failed to curb deflationary pressures. Its ABS and covered bonds purchases have collected negligible amounts while its medium-term liquidity injections seem dwarfed by a similar measure implemented three years ago. Far from raising its balance sheet by €1 trillion as expected, it will face the next Board meeting on January the 22nd on a downward slope. Something must be done urgently to set the wheels of economic growth in motion.
The obvious choice involves triggering a sovereign purchase. Purchasing corporate bonds under the current strained conditions no longer seems an option. Yet, there is nothing to suggest that the plan will work. The close-to-zero bund yields offer little scope for significant action. Differentials vis-à-vis peripheral sovereigns are due to narrow, much to the detriment of sound risk management. Bitter experience shows that diluting moral hazard can wreak havoc on overall solvency.
Will a sweeping push for sovereigns solve the Eurozone’s growth gap? There is little chance that will happen. Extra money will fail to invigorate investments as long as confidence levels are at such a low ebb. Neither will it break the current deflationary bout unless prospects markedly improve. The only hope is that it might help to avoid further deterioration until the US rates hike provide a respite. Betting on monetary policy as the only horse could prove highly delusive. Europe should waste no time in tackling widespread reforms to improve its performance. Otherwise, it might find itself trapped in an endless cycle of low-growth .