Explaining the QE programme

It is a recurring topic for my blogs and it is very much in the forefront of everyone’s minds at the moment, and that topic is, of course, Europe. To be more specific, the Eurozone and the latest efforts to underpin the economy and to generate some form of growth.

The topic has become even more pressing following the initial results in the Greek elections and the fact that the ‘radical left wing’ (media designation) party SYRIZA has won the biggest share of the election vote and had formed a coalition with the Independent Greeks. All this means that Alexis Tsipras has now been sworn in as Prime Minister and the fun and games can begin in earnest.

However, we are getting ahead of ourselves and we need to talk about the European Central Bank (ECB) and their trillion Euro quantative easing (QE) programme.

I was listening to Radio Four last week on the day the QE programme was announced and they asked pundits to explain QE as succinctly as possible. The first explanation that I heard was, ‘it is like giving a fat man a bag of crisps because he won’t open his fridge’, which was amusing, but may be not very technical. The second attempt seemed better to me, as the comment was; ‘it is like buying things and paying for them by writing ‘money’ on a piece of paper, but then it magically becomes money’. This is the benefit of being a central bank and being able to print money (or at least create money on a computer somewhere), and is a well-worn path used already by the Federal Reserve in the US and by the Bank of England here in the UK.

The numbers, as ever, are incredible and we are talking about bond purchases of 60 billion Euros per month, until at least September 2016. Of course, this being Europe, and not a sovereign state such as the UK, the terms of the QE have been fudged a little. The Germans have always been opposed to the QE option and do not want to give other countries a ‘free pass’ on their deficits, but have finally been dragged into action by the continuing weakness of the Euro-zone. The trade-off is that there is a risk sharing arrangement between the ECB and the 19 central banks and there is a limit that only 20 per cent of the new asset purchases would require the central banks to cover risks outside of their national borders.

The technicalities and consequences of this will no doubt be picked apart by people much more qualified than me, but it is suffice to say that it is another example of this ‘not quite a country’ approach that undermines everything with the Eurozone?

The merits of QE are generally disputed by many economists, but the hope is that it will provide temporary relief, while the economy gets back to some level of normality. How this process will be affected by the new Greek Government will no doubt provide plenty of fodder for future blogs.