IMD International

Final call for QE, ECB!

IMD Professor Nuno Fernandes says the European Central Bank is facing the last chance to avoid stagnation in Europe

December 12, 2014

The European Central Bank (ECB) is already late. It cannot postpone any longer, and must act decisively in buying government bonds to give some impetus to Europe's stagnant economies. The ECB's current measures—buying bonds that are backed by loans to companies or individuals, and offering cheap money to Eurozone banks—are simply not enough.

That's the clear message from the ECB's latest "liquidity auction" on December 11, when banks took up €130 billion, at the low end of expectations. The ECB is the only central bank in the world that has allowed its balance sheet to shrink over the past three years.

Under its current measures, it has so far managed to lend only a fraction of the €400 billion available to banks, despite the fact that these four-year loans have an interest rate of just 0.15%.

The disappointing result on December 11 confirms what I predicted in early September when ECB President Mario Draghi announced the bank's latest steps to boost Europe's economy. I said then that these measures would not be enough, and that the ECB needed to do much more.

So now the ECB must do what it should have done three or four years ago, and start buying government bonds. The US Federal Reserve was much bolder with its "quantitative easing," buying trillions of dollars' worth of bonds and helping the US to avoid European stagflation.

Purchases of government bonds are more complicated in the Euro zone than in the US, and the EU's complex decision-making processes don't help either. But the alternative is stagnation, and who wants that? We are getting dangerously close to the tipping point, but it is still possible to avoid a lost decade.

Nuno Fernandes is Professor of Finance at IMD, where he directs the Strategic Finance program. He is the author of Finance for Executives: A Practical Guide for Managers.

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