On Thursday, the European Central Bank is expected to announce a new quantitative easing program.
And according to a report from The Financial Times, Harvard professor Larry Summers is not convinced that the ECB’s program will live up to the hype.
Speaking at the World Economic Forum in Davos, Summers said, “There is every reason to expect QE will be less impactful in Europe.” QE programs in Japan and the US have had at least some success in reaching their goals, which in Japan was devaluing the yen and in the US was boosting economic growth.
Summers said, however, that the risks of doing too little in Europe outweigh the risks of doing too much. Summers has been the leading voice behind the economic idea of “secular stagnation,” or that certain of the world’s economies will be unable to create enough demand to sustain their current or expected growth trends.
According to the FT, Summers outlined three reasons why Europe’s QE program might not be as impactful as those undertaken in the US:
- US QE came earlier when bond yields were higher and could be forced down by the policy.
- QE in the US was unexpected so gave the economy a jolt.
- US QE worked through the capital markets, but European credit is largely bank based, so cannot work so freely
The latest indications are that the program will see the ECB buy €50 billion per month in bonds in an effort to stave off deflation and kickstart the sputtering European economy.
Markets have expected that the ECB would launch a QE program for some time, and over the last few months the euro has weakened and European stocks have rallied in anticipation of this program.
On Thursday, the wait, at least for this announcement, is mostly over: the ECB’s policy announcement is set for 7:45 am ET, and ECB president Mario Draghi will begin his press conference at 8:30 am ET.