Wednesday, 20 September 2017

European Stimulus... At Stake

Posted by Valentine at 11:44 Labels:

So what if the European Central Bank (ECB) decides to extend its current quantitative easing (QE) program in 2018? What would happen to markets? And the euro?

And most importantly… why am I even thinking of such hypothetical situation? It seems that a few reliable sources have spoken with Reuters on Tuesday about allegedly disagreements on when the monetary stimulus should finally end.

The Governing Council will gather in October to particularly discuss the future of the bank’s quantitative easing program. Stimulus has been a hot topic for quite some time now, as the bloc has been showing solid economic and inflation growth over the last months.

But the fact that economic recovery is doing well, doesn’t necessarily mean that every aspect of the economy is. The euro, for instance, is currently super strong against key counterparts, like the US dollar or the British pound. That makes it more difficult for euro exports to sell abroad.

The export case is a very clear one, because it helps us understand the internal division within the European Central Bank. Rich countries led by Germany, EU’s first economy and a renowned exporting nation, is ready to unwind the central bank’s 2.3 trillion euros bond purchasing program, while the not-so-rich nations like Italy or Greece would vote against that option.

But first is first. October 26 is the key date for European traders right now. Keeping into account that Mario Draghi is a fierceful defendant of ECB’s stimulus package, if policymakers are unable to find a common solution around this issues, the “end-date” for QE will be a decision left for a longer horizon. It could be December ‘17, it could be mid-2018… Impossible to say really.

Options on the table? Instead of putting a definite end-date to the QE program, policymakers could agree on tapering terms, which means reducing the volume of the stimulus. That could either be expressed by reducing the volume of bond purchases or extending the time frame of such operations from monthly basis to quarterly basis (for example).

What about the euro? In case of leaving the decision for later, the euro is likely to extend its current strengthening trend, in lack of any control.

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