The unintended consequences of Draghi’s QE

More than four years after Mario Draghi vowed to do "whatever it takes" to save the euro zone, he is far from done.

Analysts see the European Central Bank president signalling next month that his quantitative easing bond-buying programme will be extended beyond its current scheduled lifespan to the end of March.

As a result the ECB will be left holding about €2 trillion of government bonds by March 2018, equivalent to a fifth of the euro zone’s public debt, according to Deutsche Bank’s chief economist David Folkerts-Landau.

In a new report, The Dark Sides of QE, Folkerts-Landau slams Draghi's self-congratulatory stance of having countered the threat of a new great depression through his unprecedented actions.

“While the ECB should be commended for quick acting during the financial emergencies of recent years, this self-confidence seems increasingly unwarranted,” Folkerts-Landau said.

“The truth is that since Mr Draghi’s ‘whatever it takes’ speech in 2012, the euro zone has delivered barely any growth, the worst labour market performance among industrial countries, double-digit unemployment rates, more than 20 per cent youth unemployment, unsustainable debt levels, and inflation rates are far below the central bank’s own [2 per cent target].”

First, the ECB’s actions have taken pressure off governments to get their own houses in order. When bond yields were at sky-high levels, the threat of being tipped into a troika bailout was enough to spur countries into action. Before 2012, European states were implementing more than half of growth initiatives recommended by the Organisation for Economic Co-operation. The figure was just 20 per cent last year.

Second, as bond yields across Europe are now “more or less locked together”, they have become detached from changing political and fiscal risks in individual countries – and can’t be relied on to ring alarm bells. Irish yields, for example, barely moved as a result of Brexit even as the stock market plunged.

With government debt on the ECB’s balance sheet soaring, taxpayers will be left, by default, to mop up losses if a euro zone country defaulted. Remember public uproar after banks were bailed out during the crisis? That would be mild in comparison, according to Folkerts-Landau.