Union International: Investors may be jumping the gun by pricing the first official round of quantitative easing from the ECB into markets.
Union International: With investors seemingly convinced that European Central Bank President Mario Draghi is finally set to unleash full-blown quantitative easing imminently, some are warning that the unprecedented move is far from “a done deal”.
Solomon Roth, chief economist at Union International said, “People seriously underestimate the influence of the German Bundesbank. In our view, Mario Draghi is the best central banker in the world; he’s resisted calls for Federal Reserve-style largesse and money printing preferring to quietly acknowledge the limitations of monetary policy and what it can achieve.”
Nevertheless, the clamor for QE has grown louder with each consecutive inflation report with many economists raising the specter of a Japan-style deflationary spiral if the central bank fails to take action. The fiercest opposition to ECB quantitative easing has come from Germany with Bundesbank President Jens Weidmann arguing that QE does not create economic growth and only serves to create asset bubbles and pass risk from banks to the taxpayer.
“We concur with his assessment. The only way to boost growth in the Euro zone is to implement structural changes like doing away with old-guard barriers from entry into certain professions, reform of welfare entitlements, tackling the power of trade unions and removing obstructions to competition,” explained Roth.
Union International says that the ECB is just as likely to hold of implementing full QE as it is to deliver it. “If they don’t introduce it, we’d expect a very sharp rally in the EUR/USD because the market’s acting as though it’s a done deal,” concluded Roth.
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