Threadneedle’s Burgess sees QE arguments for ECB
Mark Burgess, chief investment officer at Threadneedle Investments, says that it is time for the ECB to consider turning on the printing presses.
We are approaching crunch time, so much faster in the Eurozone than many commentators had expected. The speed with which we have moved from Greece, to Italy, and potentially onto France is quite breath-taking, and unlike anything I have witnessed in my investment career. We are truly living in extraordinary times. The German position of wishing to defend the single currency, whilst at the same time demanding a savage austerity programme in the over indebted (mostly Southern European) economies is becoming increasing untenable and is provoking new and increasing tensions in the system. As we have said before, Europe cannot shrink its way back to health, because it’s not clear which number moves faster, the numerator or the denominator in the debt to GDP equation.
Over the next two years, buyers have got to be found for approximately €400bn Euros of Italian debt, and at the moment it is not clear who those buyers might be. Banks are deleveraging and shrinking their balance sheets selling bonds, and international investors are fleeing back to their home markets. It increasingly seems that Quantitative Easing (QE) introduced by the ECB is the only answer. Indeed it could be seen as their ‘with one leap they are free’ policy option, but with the Bundesbank culture, and fear of hyperinflation, its introduction is going to require an enormous cultural shift in the minds of the central bankers. However, without it, Italy (and indeed Spain and Greece) runs the risk of running out of money, with all the accompanying economic and social consequences.
If an ECB led QE programme is not introduced, then a change in the make-up of the Euro is the only probable outcome, and in our view the costs of this would far outweigh the risks and costs of QE. As we have said before, it is likely that we will see a hard-core of mostly northern European economies, congregate around Germany, leaving the Southern over indebted to devalue and start again. It is difficult to see this occurring without it triggering at the very least, dislocation in the European financial system. It is time to prime those printing presses!
Mark Burgess is chief investment officer at Threadneedle Investments