Political uncertainty to neutralise effect QE argues Rowan Dartington’s Stephens
Political uncertainty in Europe is likely to neutralise the stabilising effect of QE in terms of improved confidence, business investment and job creation, says Rowan Dartington Signature’s Guy Stephens
The winds of change are starting to blow across Europe with the ECB initiatives on QE now looking like an academic sideshow. Arguably, the ECB should have implemented QE two years ago instead of waiting for the deflationary spectre to rear its head. Even with the huge liquidity stimulus announced last week, QE is unlikely to make any difference in the short-term to the disaffected voter. It has been a contributory factor in the US and UK by stabilising the banking sector leading to confidence for businesses to invest but it has been no panacea for the consumer and voter.
A large dose of empathy goes a long way to understanding why the Syriza party has been returned with such a large majority in the Greek elections. Just imagine if the UK economy had shrunk by 20% over the last 5 years. Many pensioners are relying on food hand-outs, there are prolonged power cuts, national unemployment is running at 28% and for the under-25s it is over 60%,and getting worse. No wonder the vote for change has been so pronounced and we now hear that the coalition has already been formed with the far-right Greek Independent party.
So what happens next? Greece cannot participate in QE before July with inclusion being dependant on good behaviour with regard to Greece’s current review of its bailout. Syriza will be striving to have some of its debt written down in order to increase spending to get growth underway. If this can be agreed and QE launched then we will have a way through this without any Euro fallout or confrontation. The fact that Mario Draghi has gone against the Germans with the implementation of QE is an encouraging sign that something has to change, regardless of the entrenched views of some members.
Alexis Tsipras has made reference to the current bailout deal as being akin to ‘Fiscal Waterboarding’, which is a direct attack on the German position. Whilst it has historically been the correct call to buy the equity market of any country implementing QE, the degree of support behind Mr Tsipras must be making the Brussels bureaucrats ponder. Portugal has elections in September this year, as do the Spanish in December, whilst the UK Conservatives have offered a referendum should they win in May.
Clearly, this Greek result is making the pro-European stance look weaker and the rise of the more radical parties more justified. This all provides uncertainty and will most likely neutralise the stabilising effect of QE in terms of improved confidence, business investment and job creation.
Mario Draghi made the right call in announcing QE before the Greek election and in surprising on the magnitude. The rest of Europe may well need it if the coming months become confrontational.