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Turning Europe from a good trade into a good investment

Quantitative easing is broken.

Central bankers have fought the crisis with low interest rates and asset purchases. This playbook has worked in the US but failed in Europe and Japan, due to their bank-centred financial systems and ageing demographics. Today, there are signs that central bankers are growing increasingly uncomfortable with this cycle of QE infinity and more aware of its collateral effects. The tide is turning, and I believe we will witness a radical shift in policy. QE helped to kick-start growth in the US by lowering funding costs for firms, boosting asset prices and consumer confidence, as well as keeping the dollar cheap. Only the last of these transmission channels has worked in Europe.

Consumers have been saving rather than spending, with stagnant unemployment overshadowing the windfall from rising asset prices. Bond markets have funnelled cheap liquidity to large firms, some of which now get paid to borrow. But smaller firms, which generate more than 80 per cent of new jobs, have been left out: most rely on banks, not bond markets, to fund themselves.

European banks, still hungover from doubling their balance sheets up to €35tn during the pre-crisis decade, have been hit by a triple punch. Low interest rates, tighter regulation and persistent non-performing assets have hurt profitability and pushed them to a much-needed deleveraging. Yet in doing so, the banks have broken the transmission mechanism of monetary policy stimulus.

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