After saving the day with its pledge to “do whatever it takes” in 2012, the ECB has arguably now brought on a recovery with its quantitative easing programme. But analysts expect the policy’s effects to fade rather than grow with time. And the Bank is neither willing nor able to prevent single-handedly a Greek exit from the euro-zone or eradicate the risk of contagion. Speculation about the QE programme and its eventual announcement and implementation played a big role in boosting bond and equity prices and depressing the euro exchange rate. This may have helped to cause the recent modest economic recovery and even some pick-up in bank lending. But there are several reasons for caution. The initial positive market response seems to be reversing now that the programme is underway. And earlier movements have had a limited impact on the wider euro-zone economy: the decline in the exchange rate has failed to generate a strong recovery in exports and bank lending rates have not fallen as sharply as government bond yields.“Admittedly, inflation has risen to zero after just four months in negative territory and the effect of falling prices has so far been positive. But the slow recovery that is envisaged will do little to erode the spare capacity in the economy and deflation remains a real threat. This should ensure that ECB interest rates remain at rock bottom levels and the QE programme is implemented in full”, says Capital Economics.The ECB has overseen the provision of huge amounts of central bank liquidity to keep the Greek banking sector afloat. But it may yet pull the plug if a deal is not reached to convince it of the Government’s and banks’ solvency. Other potential triggers for Grexit include a messy default on near-term obligations or a “no” vote in a referendum on austerity and euro-zone membership.
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