It was another busy week in the euro saga. An informal vote on independence for Catalonia showed that more than 80% of the population were in favour.
That was a reminder of the potential for political instability triggered by “insurrectional electorates”, as the FT’s Wolfgang Munchau puts it. If Europe slips into a Japan-style slump, austerity-weary voters could decide to leave the single currency.
On the plus side, investors were happy to note that the European Central Bank (ECB) was stepping up efforts to prevent a slump. Last week’s press conference by the ECB president, Mario Draghi, wasn’t quite a promise to start quantitative easing (QE) by buying government bonds, but it was pretty close.
Draghi said he had asked staff to start preparing further unconventional measures and confirmed that he wants to swell the ECB’s balance sheet by €1trn.
He noted that if current policies (buying asset-backed securities and providing cheap loans to banks) aren’t enough to reach the €1trn target, or the outlook deteriorates significantly, new measures will follow.
As several analysts have pointed out, the data continue to deteriorate. Thanks to lacklustre demand from banks and the small size of the asset-backed security (ABS) market, it is unlikely that current measures will get the ECB to its target.
So that really only leaves large-scale purchases from the huge sovereign bond market to fill the gap. QE, the last few years show, weakens currencies and boosts equities, which is what cheered the markets. Expect European QE by the end of the first quarter of 2015, says Deutsche Bank.