The Independent Market Observer

The ECB Pulls the Trigger on Stimulus

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jan 23, 2015 12:36:00 PM

and tagged In the News

Leave a comment

ECBThe top story yesterday, at least in financial and investing circles, was the European Central Bank's decision to launch its own version of quantitative easing (QE). In short, the central bank will buy bonds in order to force down interest rates and encourage business investment and consumer spending.

A long-awaited (and much-needed) move

Getting to this point has been a slow, hard slog, with Germany resisting every step of the way. Even now, the QE program includes a limitation that holds national central banks responsible for losses on their own country’s bonds.

Nonetheless, this is a very big step. Europe has decided, finally, to stand up and largely unify financially to preserve the eurozone. More important, the program is not the usual minimalist approach: it’s larger and longer term than expected. 

What Europe needed was a real QE program like the one the Federal Reserve launched in the U.S., and what it got was very close to that.

Benefits for Europe and beyond

After some consideration, financial markets loved the plan. We can reasonably expect European markets and companies to benefit, and markets in other countries should see indirect benefits as well.

European companies will profit from lower borrowing costs and especially from a cheaper currency, making them much more competitive as exporters. European markets will benefit as the companies do. Plus, they’ll probably also get a boost as interest rates decline and a rising money supply lifts nominal asset values—just as we saw here in the U.S.

Markets elsewhere in the world will enjoy the same perks, albeit indirectly. There is much to celebrate in this program. 

So what’s not to like?

The real purpose of QE is not to inflate financial markets but to stimulate real economic growth. Here, there's more to worry about.

In my opinion, the Fed’s stimulus laid the foundation for U.S. recovery, but growth didn’t actually start until consumers began spending again—and, critically, when government moved away from spending cuts. When you look at the U.S. recovery, those were the two key factors. Fed stimulus and low rates helped set the stage for the recovery, but that wasn’t enough on its own.

In Europe, then, the stage is now set, but we’re still waiting for the actors—the consumers and governments—to show up. European governments are, by and large, still in austerity mode, which is a headwind, and employment remains in a coma, constraining consumer confidence and spending. Just as it did in the U.S., it could take years for the monetary stimulus to actually work its way into the real economy.

In fact, you could argue that’s a best-case scenario—that the ECB stays the course and continues to stimulate until the real economy comes back to life. The ECB has explicitly provided for a longer-term program, through September 2016, but it remains to be seen whether that will be long enough.

Moreover, the ECB’s action doesn’t resolve Europe’s ongoing political risks, such as the Greek election and potential repudiation of its rescue deal with the eurozone. And the situation in some countries, such as Germany, may actually get worse.

A positive step for the eurozone

Overall, the ECB announcement is good news, and much better news than many had expected. Of course, it’s only the first step on a long road, with difficult challenges ahead. But the journey of a thousand miles does begin with a single step, and this is a big one.


Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®