Having previously pledged to do ‘whatever it takes’ to save the euro, it would appear a vacation or some quiet time for Mario Draghi would’ve sufficed. The President of the European Central Bank (ECB) caused the euro to fall 0.4% to $1.2034 following comments which suggested the bank could start quantitative easing soon. Mrs Draghi probably knew Mario was going to propose a few months in advance by the looks of things.
Speaking in an interview with the German newspaper Handelsblatt, Mr Draghi said: “We are making technical preparations to alter the size, pace and composition of our measures in early 2015.” Lee Hardman, a relative of Phil Mitchell* and currency analyst at Bank of Tokyo-Mitsubishi UFJ, said: “The comments suggest the ECB will soon adopt sovereign debt QE, which may come as soon as their next meeting.” Mr Hardman should definitely consider taking up tarot card reading.
What would the purpose of QE be? Well, essentially, it would serve to inject cash into the banking system, stimulate the economy and push prices higher. What would this mean? Bond prices may rise due to the added demand, and I’m not talking about cinema tickets to see Daniel Craig. Issue? The yield available to bond investors would fall, sky fall, and ultimately reduce the general level of interest rates in the eurozone banking system. Doesn’t sound too great, does it? Nein. This is precisely what has helped to weaken the value of the euro on the foreign exchanges.
Now, following a fall in consumer prices over Christmas, the first time in over half a decade, the ECB is fighting to stave off a deflationary spiral in the euro area. That said, not everyone agrees with the necessity of QE. The ever efficient German-led opposition claims it ‘increases taxpayer risk and undermines the incentive for governments to push through economic reforms’.
So, Britain would benefit from QE in the eurozone also, right? LOL JK. Uh oh. A major issue highlighted by financial experts is Britain’s 6% current account deficit – the gap between what we earn from the rest of the world from our trade and investments and what we pay to the rest of the world.
Now we already have significant trade deficits with Germany (with which our trade deficit is the biggest of all our trading partners), France, the Netherlands, Belgium/Luxembourg, and Spain. If that wasn’t embarrassing enough *cough Osbourne*, our deficit on trade with the euro area is the biggest of any country – between January and September of this year, it was 70.3bn euros or £55bn, up from 54bn euros in the comparable period of the previous year.
A weakening euro will really screw Britain over, widening that deficit further – as UK exports to the euro area become more expensive, and imports from the eurozone become cheaper. The European Central Bank’s supposed cure for eurozone deflation is to export it to us – strengthening sterling will harm our exporters and put our already low inflation rate of 1% under downward pressure. Nice one, Mario.
The moral of the story is, although deflation ostensibly seems like a great thing, there is a serious risk of economic stagnation and growing doubts about Britain’s ability to service its huge debts.
*Biological evidence is currently under review as to whether Mr Hardman is indeed a blood relative of hard man, Phil Mitchell.
By Garry Caprani