By Matthew Lynn
It boosts asset prices. It weakens the exchange rate. It bails out the banks. Whether central banks should launch programs of quantitative easing is still hotly debated, and so is the size and timing of those injections of cash into the economy. Even so, just about everyone is signed up to the view that those are the consequences. After all, it is what has happened in the countries where it has been tried.
But here is an odd thing. In the eurozone, it turns out to be wrong. The European Central Bank launched a massive blast of QE in March this year. And what has happened since then? Soaring equity prices? Afraid not. A weaker euro? Nope, not that. A stronger banking system? Not much sign of that either. Indeed, the interesting thing about eurozone QE is that is has so far had a negligible impact on anything.
That has two consequences — and neither of them are very comforting. The ECB is going to have to try something else to finally inject some life into its flatlining economy. And other central banks are going to be a lot more anxious about fresh rounds of QE after observing just how ineffective it has been in Europe.
The ECB agonized for years over whether it should launch QE. While the Federal Reserve and the Bank of England started printing money on an epic scale to try and dig their economies out of a full-scale depression, Europe’s central bank sat on its hands. Its presidents fretted about the impact on inflation, the Bundesbank plotted behind the scenes to prevent it ever happening, and German lawyers swotted up on the EU treaties to try and work out whether it was legal or not.
Given what has happened since, however, it could have saved itself all the anguish. A Jeb Bush campaign speech is probably more exciting. Seldom can so much intellectual energy have been expended on a policy that turned out to be quite so inconsequential.
In March this year, ECB President Marion Draghi finally launched eurozone QE.
There was, when it finally came, nothing halfhearted about it. The total program would amount to 1.1 trillion euros, and it started off with 50 billion a month. It was on a similar scale to the Federal Reserve’s programs, and a lot bigger than anything the British had done.
And so far? It has had no discernible impact.
Just take a look at some of the figures. The Euro Stoxx 50 /zigman2/quotes/210599380/delayed XX:SX5E -0.28% , the main benchmark for the zone’s equity markets, was at 3,600 when QE launched. Now it is at 3,200, significantly lower than when QE was launched. The same true for other major indices in the eurozone. The German DAX /zigman2/quotes/210597999/delayed DX:DAX -0.35% is well below its March level, and so is France’s CAC-40 /zigman2/quotes/210597958/delayed FR:PX1 -0.23% .
Okay, you might argue, the global equity markets have taken a knock over the summer. What about the currency? There is no evidence of QE having much impact there either. A week after QE was started, the euro /zigman2/quotes/210561242/realtime/sampled EURUSD -0.0937% tumbled to a 12-month low of 1.04 against the dollar. But since then, it has actually strengthened against the American currency, rising to its current level of 1.14.
What about other assets such as property? According to Eurostat, house prices are currently racing ahead at an annualized rate of, er, 1.2%. It’s not exactly a bubble. True, there are some hot spots — Irish prices are rising at 10% a year, and Estonian prices at 7%, but in some of the big economies such as France they are actually falling. Even in Germany, which you might expect to get the biggest asset price impact from QE, house prices are rising at less than 4% a year.
Nor is the banking system getting much of a shot in the arm. Deutsche Bank /zigman2/quotes/203042512/composite DB -1.90% has just announced big losses BNP Paribas /zigman2/quotes/203020019/delayed XE:BNP -2.79% managed to slightly beat analysts’ estimates in its latest results, and so did Italy’s Unicredit /zigman2/quotes/200769686/delayed IT:UCG -1.18% . But it is hardly a bonanza.
Meanwhile, the underlying economy is just as stagnant as it has always been. The eurozone was back in deflation in September, with prices across the region falling by 0.1%. Growth is tepid, and unemployment as high as ever. A few economies such as Spain have put on a growth spurt, but they are the exception. The region as a whole is as flat as ever.
In a speech last week, Draghi insisted the program was working, arguing a pick-up in growth was evidence of that. But the global economy is growing, and the eurozone remains its weakest link. There is no evidence to show it is growing faster than it otherwise would have done.
That is a problem. For central banks, QE is meant to work by lifting asset prices, and therefore lowering the cost of capital, and reviving confidence in the wider economy, while at the same time lowering the currency, and so helping exporters. If anyone has any other theories on how it operates, they are keeping them to themselves. By those measures it hasn’t worked. The 1.1 trillion has been printed, thrown at the economy, and disappeared largely without trace.
That has two implications.
The first is that Draghi will have to come up with something else. If his first round of QE has had no impact, then the temptation will be to try another one, and make it even bigger this time. Two trillion or even 3 trillion euros are already being hinted at , and no one would be surprised if that happened.
He may come up with something more radical, however. He could push interest rates deep into negative territory. Or he could try some variant of helicopter money —that is, putting cash directly into people’s bank accounts.
The second implication is that other central banks will grow more wary of printing money. They will have watched what has happened in Europe, and made a note of the results. And they might well conclude that QE does not automatically work. It did some good in a few countries. But who knows? Perhaps that was just a coincidence — and those economies would have recovered anyway.
We can no longer glibly assume QE boosts asset prices, or weakens a currency. It did in the U.S. and the U.K.. But it hasn’t in Europe — and that may deter central banks from trying it again.