Analysis: ECB flags willingness to proceed with quantitative easing

Mario Draghi’s deputy has sent the strongest signal yet that the European Central Bank is considering a programme of quantitative easing (QE) to boost the flagging euro zone economy. The news coincides with new Irish data which suggests the jobs recovery is strengthening .

Vitor Constancio, ECB vice-president, said in London the bank might move in the first quarter of 2015 to begin buying the sovereign bonds of single- currency members. Long awaited, such a step would take the Frankfurt-based institution into ground previously explored by the US Federal Reserve, the Bank of England and the Japanese central bank.

The aim would be to provide a spur to growth and fend off the ever-growing threat of deflation in the euro zone, which if it took root would hamper the recovery for years.

But what would QE mean for Ireland? Little enough in the first instance, although the prospect remains that Irish exporters would gain from a declining valuation on the euro vis-à-vis currencies such as the dollar. That would be a positive development, although high- level market observers remain concerned that any QE programme by the ECB would not go far enough to lift countries such as Italy and Greece from their present state of distress.

Capital key

The most telling point in Constancio’s intervention was that any bond-buying would be carried out according to the ECB’s capital key, under which member states’ shares in the bank are divided between them in line with the proportional size of their economies. This simply means more German bunds would be bought than French bonds, more French than Italian and so forth.

Of course, the German government is not exactly crying out for buyers of its bunds. But the thinking goes that large-scale purchases of German debt by the ECB would have the effect of crowding out private investors who might then be minded to put their money to use elsewhere, boosting economic activity.

Germany accounts for some 18 per cent of the capital, Ireland roughly 2 per cent. It follows that any ECB purchases of Irish paper would be minimal, raising questions as to whether there would be any traceable impact on already- low borrowing costs on markets. With Irish yields still declining, the sense right now is that the mooted QE programme has already been priced in by investors.

At issue over a longer horizon, however, is whether QE by the ECB actually provides the requisite nudge to the listless euro zone economy. This is no small concern from the Irish perspective, given lingering anxieties about the threat to the recovery from the standstill in Europe. In the shorter term, the gain might all be on the currency side.

Growth plan

While an infinity of argument inevitably surrounds moves by the ECB to break down the boundaries on its action, two further points might be noted. First, the bank seems serious. It was not for nothing that Draghi went to London to issue his “whatever it takes” entreaty to save the euro in summer 2012. Second, Constancio’s remarks came on the same day as EU Commission chief Jean- Claude Juncker unveiled his growth plan for Europe.

All of this comes amid improving job figures on the home front, with the standardised unemployment rate revised downwards to come in below 11 per cent in October for the first time in five years .