By Chris Berry (@cberry1)
For a PDF of this note, please click here.
At this point, what could possibly be said about the economic health in the Euro Zone and the prospects for growth that hasn’t already been said? Realistically, the only question that has yet to be answered is how to ignite growth? This is a question you could ask about numerous economies around the world, but the structural challenges in the Euro Zone and the fact that you have a political union but not a financial one appear to be the reasons for what little growth actually exists.
With that in mind and with the European Central Bank (ECB) essentially out of ideas, the announcement of a quantitative easing (QE) program of €60 billion per month was likely the worst kept secret in finance. Specifically, this program will take the form of an asset purchase mechanism where the ECB will buy government bonds, private sector bonds, and debt securities of European institutions totaling €1.3 billion during the “life” of the program. Many would argue that the QE programs in Japan and the US have failed to achieve their objectives and this is why I mentioned Albert Einstein in the title of this note. He’s credited with saying that the definition of insanity is doing the same thing over and over and expecting a different result. Is anyone in the ECB familiar with this?
In just the month of January alone, central banks in Denmark, Turkey, India, Peru, and Canada have all lowered rates in an attempt to ignite growth. Additionally, the People’s Bank of China (PBOC), quietly injected USD $8 billion into the domestic banking system via a 7 day reverse repo lending facility. Clearly, the Swiss National Bank’s un-pegging the Franc from the Euro was the first domino to fall and other central banks around the world are positioning for a challenging way forward.