In his last speech, Mario Draghi said that the policy conducted by the ECB right now (they are conducting a negative interest rates and QE policy) is working, but he asked for more time to see the results. Actually, the ECB is buying around 80 billion euros a month in order to try to increase inflation in the euro area while they keep interest rate in the negative area, that’s in the thin line between zero and negative growth. But, does this make sense? Is it enough to solve the problem?
We can see that part of the macroeconomic theory it’s being fulfilled, as the euro is weak, what in theory would boost exports and as a consequence, growth, but we’re not in a normal environment right now. There are major external forces affecting the EU, as the global economy is slowing down, and that makes the thing more difficult and not enough to solve the EU problem.
After 13 months of QE, and after having increased it quite since the first program conducted by the ECB, we have seen how inflation remained flat. The problem is, that despite the help of a low oil price, the Eurozone has not been able to grow at a stronger level in order to create inflation. That’s really dangerous, as deflation will hurt revenues and as a consequence, stocks are going to be hit and so wealth as well, what will create ‘a trap’ as spending is going to decrease.
In my opinion, helicopter monetary policy makes sense right now. We must remember that the ECB objective is to maintain inflation at around a 2%, and it seems that the are not able to do it alone using the traditional weapons. I think that Draghi should think about boosting spending and consumption from citizens, so that’s why I think that helicopter monetary policy is a good idea right now. At the end of the day, we must remember that internal consumption is key in the Eurozone when we talk about growth.
On the other hand, Draghi is facing this problem alone. The EU need structural and fiscal reforms in order to help that expansive monetary policy, but this seems to be a ‘dark zone’, as it seems that governments are not disposed to help at the moment.
For all those reasons, I think that European stocks have lost momentum and are not a good idea to invest in it until macroeconomic data show stronger growth or the ECB decides to change its mind (or governments decide to join the ECB and stimulate the economy via an expanding fiscal policy). We’ll also see during this year the impact of FX in earnings, what joint with all other forces can be a hard hit to European companies. But what worries me the most is the possibility of a stagnation in the European economy, what will happen in the mid term if things keep going like until now.