The European Central Bank has announced a €60 billion ($69 billion) monthly government bond buying program—Quantitative Easing—but that won’t do much for the moribund continental economy.
Central banks can print money to purchase government bonds to push up prices and lower interest rates on those assets and competing debt, such as corporate bonds and bank loans. In the United States, the Federal Reserve also bought billions in federally-sponsored mortgage-backed securities, such as those issued by Fannie Mae.
The aim is to encourage more borrowing by businesses and homebuyers—stimulus spending financed by running the printing press.
The Fed enjoyed some success boosting U.S. growth, but here are five reasons why QE won’t work for the ECB.
1. Eurozone Is Not a Country
The European Union does not have a large budget and issues few euro-denominated bonds the ECB could purchase. Instead, the ECB will have to purchase individual country debt—it is as if the Fed had to purchase a basket of bonds issued by California, Iowa and other states.
Markets for European bonds—both sovereign and corporate—and bank lending are highly fragmented along country lines.
Consequently, it is unlikely that QE will have much effect on banks’ willingness to make new business loans in places buffeted by the financial crisis, like Spain and Greece.
2. EU Has No Fannie Mae
QE seems to work best when central banks inject capital directly into specific markets. The Fed purchased mortgage-backed securities that significantly lowered interest rates on mortgages across America. Housing prices recovered much of the value lost during the financial crisis, and new home construction rebounded.
The EU has no analog to Fannie Mae and Freddie Mac, and the ECB cannot readily purchase mortgage-backed securities to boost the European housing sector.
3. Fiscal Policy Is Pulling in the Opposite Direction
Europe’s largest economy, Germany, recently accomplished a balanced budget for the first time since 1969, and austerity programs intended to restore solvency have forced massive government spending cuts and tax increases in Spain, Greece and other Mediterranean states.
