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ANALYSIS: ECB acts but Japan lesson looms large

For those outside the eurozone, the continuation of QE, albeit with the caveat of ‘tapering’ asset buying, might sound a little old hat.

However, with the outcome of last weekend’s Italian referendum fresh in mind, it’s a reminder that, politically at least, tensions remain and the ECB was always going to have to tread carefully.

At the very least, few commentators are surprised that Mario Draghi has extended the bond-buying programme, even if asset purchases will be reduced from €80bn to €60bn per month from next April.

While some may be disappointed by the continued spending, Neil Williams, group chief economist at Hermes Investment Management, pointed out that it’s easy to forget that Draghi is still looking to inject an extra €540bn – an amount that easily surpasses the combined GDPs of Greece and Portugal.

He said: “A lesson from Japan is that QE provides cash to lend, but cannot force consumers and firms to borrow. The eurozone looks to be halfway down the Japan route. It too may be running QE and negative rates, but has yet to loosen the fiscal reins.

“Yet, austerity has pulled down its budget deficit from 6.25% of GDP in 2009 to 2% – below the 3% Maastricht test for Economic and Monetary Union.

“We suspect this makes it easier for fiscally-prudent Germany and the ECB to ‘turn a blind eye’ to profligacy by the higher-debt members needing to maximise growth. With Greece losing a fifth of its real GDP since austerity and Italy/Spain running 36%/43% male-youth unemployment rates, reform fatigue – and populist parties – are building.”

Potential volatility caused by the electoral calendar across Europe has been well signposted by investors. Indeed, some would even see European equities as a good bet on the proviso that the news is already priced in.

Part of the Bonhill Group.