There are a bunch of things in the ECB post-mortem note just released by SocGen’s Michel Martinez, reproduced below, but here are the punchlines. First, on the impact of ECB QE on the economy: “we argue ECB QE could be five times less efficient than in the US. In December, press reports suggested that the ECB had run studies suggesting that a €1000bn QE programme would only boost price levels by 0.2-0.8 after two years, five to nine times less efficient than the studies for the US or the UK. The impact on GDP is not provided, but it would be reasonable to assume the same impact as on inflation on a cumulated basis.” In other words, it will be an outright failure to do anything to boost the European economy in its current format. That, as a reminder, is its stated purpose.
So what does SocGen suggest? Simple: the same thing every Keynesian says when justifying why a piece of occult economic voodoo fails to work: it wasn’t big enough. To wit:
“The potential amount of QE needed is €2-3 trillion! Hence for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-3tn, not a mere €1tn.”
Or as Charles Dickens would put it:
And since there is nowhere near enough bond supply in Europe, the ECB will have to proceed with monetizing, drumroll, stocks.
Should the ECB target such an expansion of its balance sheet, it would have to ease some conditions on its bond purchases (liquidity rule, quality…) or contemplate other asset classes- equity stocks, Real Estate Investment Trust-(REIT), Exchange-traded fund (ETF)…- as the BoJ, previously.
Because what tens of millions of unemployed Europeans really need to help their lot in life, and to boost their confidence, is for the central bank to buy the stocks sold by the richest 0.001%.
Full note from SocGen:
Large QE with symbolic risk sharing
The ECB announcement today was well in line with our call that the sovereign QE programme could be large scale but not pari passu. The share of mutualisation is symbolic (1/11%). Yet, they point to higher volume than expected overall (€1140n in total) and reinforces the probability that the ECB would reach (or go over) its stated intention of 1trn increase in balance sheet.
A) The size of QE programme is €60bn per month, €1140bn in total
The main measure is an expandable asset purchase programme that includes European agencies and sovereign and complement the current programmes (Covered bond and ABS purchase programmes). Those new programmes will start in March 2015 and run until end September-16 or until the inflation outlook converges to 2.0% medium-term, which means that it could be bigger. The combined purchases will amount to €60bn per month. Apparently, the expanded programme will not include corporate bonds.
There was a large majority to today’s announcement while the Governing Council was unanimous on the idea that QE is a legal monetary policy tool.