The main reason why the ECB quantitative easing program has failed is that it started from a wrong diagnosis of the eurozone’s problem. That the European problem was a demand and liquidity issue, not due to years of excess.
The ECB had been receiving tremendous pressure from banks and governments to implement a similar program to the US’ quantitative easing, forgetting that the eurozone had been under a chain of government stimuli since 2009 and that the problem of the euro-zone was not liquidity, but an interventionist model.
The day that the ECB launched its quantitative easing program, excess liquidity stood at 125 billion euro. Since then it has ballooned to 1.8 trillion euro.
“Only” after 2.6 trillion euro purchase program and ultra-low rates:
1. Eurozone PMIs are atrocious. The euro-zone index falls from 52.7 in November to 51.3 in December, well below the consensus forecast of 52.8. More importantly, France’s PMI plummeted from 54.2 in November to a 34-month low of 49.3.
2. Unemployment in the euro-zone, at 8%, is double that of the US and comparable economies. Youth unemployment rate remains at 15%.
3. Economic surprise has plummeted as the ECB balance sheet reached 41% of GDP (vs 21% of the Fed).
4. More than 900 billion euro of non-performing loans remain in the banking system, which keeps a trillion euro timebomb in its balance sheets (read). A figure that represents 5.1% of total loans compared to 1.5% in the US or Japan.
5. Deficit spending is rising. Government debt to GDP has risen to 86.8%.
6. The number of zombie companies -those that cannot pay interest expenses with operating profits- has soared to more than 9% of all large quoted firms, according to the BIS.
7. Sovereign states have saved around one trillion euro in interest expenses, but have spent all those savings. Today, almost no eurozone country can absorb a modest rise in interest rates, and Italy, Spain, France, Portugal, Slovenia, and others are demanding more spending and more deficits.