Quantitative Easing (QE) seems to
have been at least something of a success in both the US and the UK. Its
outcome has been apparently less than stellar in Japan, but they are,
nevertheless, prepared to persevere with it, in the Land of the Rising Sun.
All of the above economies have a
structure that could be characterised as homogenous, with monetary policy
functionality that is, in a real sense, centralised. This places them in
contrast to the de-facto situation in the Euro zone, at least at this point in
its development. While the European Central Bank (ECB) is independent of the
constituent governments, it has on its governing council a representative from
one particular country who is truly “primus inter pares”, or first among equals,
in the most extreme meaning of the term.
Germany is very conscious of the
value it derives from its membership of the Euro. The recent experience of
Switzerland, in having to take drastic measures to maintain some kind of
reasonable value for its currency in order to prevent it appreciating, on the
back of safe haven status, to a level that is disastrous to its exports, is
exactly the situation that Germany would find itself in if it still used the
Deutschmark. On the other hand, Germany is still the locomotive of the Eurozone
economy. This has made it very fearful of any circumstances where it might be
required to pick up the tab for the shortcomings of any or all other Eurozone
members.
And this is what has given rise to
the latest fudge in the preparation for Eurozone Quantitative Easing – the proposal
that if bonds are to be bought in order to implement it, that each country’s
central bank will have to be responsible for its own bond purchases, thereby
placing the associated risk with the individual countries rather than with the
Eurozone as a whole. If this were to happen the risk will not be, as they say,
mutualised.
The Irish Minister for Finance,
Michael Noonan, has expressed his displeasure at this idea. According to the
Irish Times, he
did so at a conference in Dublin. The Times reporter wrote “Mr
Noonan’s remarks received a cold response from ECB executive board member
Benoît Cœuré, who was sitting beside him in the same panel”.
If the process is not handled
centrally it is even hard to see how it will be successfully implemented. Will
each country be given a quota? How will their activities in the purchasing of
bonds be policed?
The
effect on the Single Currency
The recent precipitate fall in the
value of the Euro against all major counterparts (not just the Swissie),
indicates that Forex traders the world over have priced in an announcement of
the start of QE in the next ECB monetary policy statement, which takes place
tomorrow, Thursday (Jan 22nd). For these traders, QE is QE, as
implemented in Japan, the US and Britain. Any deviation in the manner of its
operation, such as that outlined above, has high potential to lead to an
unwinding of Euro short positions. This will have the effect of reversing the
fall that has been underway. Such a reversal could be severe because it would be
likely to take place in quick time.
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