Quantitative easing in the euro zone: Will the costs and the risks not outweigh the positive effects? Author: Patrick Artus Quantitative easing in the euro zone will lead to major turmoil in financial markets: • Negative interest rates; • Risk of a bubble in European equities; • Squeezing of risk premia (default, sovereign); •
Squeezing of risk premia and flattening of yield curves; • Investors accumulating risky assets without the normally associated risk premia; • The resulting risk that the highly expansionary monetary policy will be irreversible; • Incentive for governments to not correct their fiscal deficits. The ECB has accepted this turmoil and these risks; what goal is it pursuing that led it to accept them? It must have been a choice among:
• Simply meeting its mandate and bringing inflation back towards 2%; • Stimulating the euro-zone economy by weakening the exchange rate (in the absence of other monetary policy transmission channels); • Driving banks and institutional investors to buy risky assets to improve the financing of the economy; • Making it easier to finance fiscal deficits and easing the pain of the high public debt ratios.