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The end of QE is nigh: what does that mean for Ireland?

Opinion piece by Brian Hayes MEP, published in the Sunday Business Post, 22nd October 2017

After more than two years of money being pumped into the European economy through the ECB, it seems that the often-contentious Quantitative Easing (QE) programme is grinding to a slow halt.

ECB President, Mario Draghi, recently signalled to the European Parliament’s Economic Affairs Committee, of which I am a member, that the ECB will make a decision on the next stages of the QE programme in its October Governing Council meeting next Thursday.

All the indications are that by the start of next year, the ECB will start to phase out QE. This will signify a major change of monetary policy for the Eurozone. It will mean that banks, corporations and individuals will not be able to get cheap money for much longer; interest rates will be increased in time and, more generally, we will see more competition in the lending market.

It is fair to say that Ireland has done well out of QE. The programme has helped to revive the Eurozone, a market that takes in over a quarter of all Irish exports. Interest rates have been reduced, yet as we all know the banks are not doing all they can to pass on the benefits of the low-interest rate environment to consumers. The design of the QE programme has also ensured that ample credit has been made available to banks so that they can lend out to the real economy. However, question marks remain about real lending being channelled to SMEs.

QE has not been the key driver for Ireland’s economic growth over the past three years but it has created favourable conditions. It may not be noticeable but these conditions have trickled down to consumers who are increasingly spending more.

The Irish government has benefited considerably from the QE programme given that the programme ensures that the Central Bank takes government bonds onto its balance sheet. This effectively pushes the government’s borrowing costs down. We are currently getting 10-year money for less than 1%. The QE programme has helped us save between €3 billion and €4 billion in reduced annual interest payments.

However, when the tapering of QE begins, the Central Bank will have to start selling these bonds to the open market at an increased price. Our bond yields will likely go up and government financing costs will increase.

The more immediate worry for Ireland is whether or not our bonds can be included in some of the upcoming QE bond purchases. Under the programme, the ECB can buy no more than 33 per cent of eligible bonds from a single state. Ireland is very close to this limit at the moment. We need to ensure that this rule is amended so that Ireland can continue to benefit from QE and not be put at a disadvantage to other countries. I raised this issue two weeks ago at a hearing in the European Parliament with Mario Draghi.

The end of QE will hit both how the real economy is financed and how the government funds its operations. We have to be well prepared for this. That is why it is so important that we achieve the target set out by Minister Donohoe to get to a balanced budget by next year.  We also need to constantly monitor our banks to ensure that they are in good financial state in order to be able to lend to individuals and businesses.

The tapering of QE will take a long time. The US is still in the midst of unwinding its QE programme that began in 2008. However, the announcement of the end of QE in the Eurozone, I believe, will be a strong political signal that Europe has turned the corner and is in a strong economic position.

Since he became President of the ECB in 2011, Draghi has faced crisis after crisis. But credit to him, he has done “whatever it takes” to save the euro, as he famously said in 2012. This year things turned the corner for Draghi; he has finally been able to breathe a sigh of relief, as the Eurozone is looking healthy again.

Inflation is in a good position at 1.5% following five straight years of either deflation or very low inflation rates. The OECD and the IMF have raised their growth forecasts for the Eurozone in 2017 and 2018. While problems remain with Greek public debt and Italian banks, systemic risks from Spain, Portugal and Ireland are well and truly gone.

In reality, we may not become fully aware of the true impact of QE for many years – the ECB’s balance sheet has been bloated substantially in the last 2 years due to QE. This is going to have lasting effects for the whole Eurozone financial system. For the time being however, Ireland has to ensure that government finances and banks are prepared for this upcoming major shift in monetary policy.

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