Weak Inflation Urges for European QE


Equities dove worldwide as inflation and oil continued to fall, prompting more analysts to urge the European Central Bank to begin its own large-scale quantitative easing program.

The euro fell against the dollar in the first days of trading in 2015, sinking from $1.2098 to $1.1864, while analysts expect the euro to weaken even further. Morgan Stanley and BNP Paribas expect further declines in the currency, while Santander is an exception in expecting the euro to rise from current levels. The currency recovered slightly in afternoon trading, rising to $1.1917 in afternoon trading in New York.

Most analysts worldwide point to weak growth and deflationary pressures throughout Europe as causes for the currency’s decline. In Spain, prices fell an annualized 1.1% in the last reading, and the CPI expects to fall further in both the U.S. and Europe amidst falling oil prices.

Oil fell further on Monday, worsening the threat of deflation in the European Union. Brent oil futures expiring in February fell 5.4% in Monday trading to less than $53.50 per barrel. In the U.S., WTI futures fell 4.4% to slightly over $50 per barrel.

Watershed Greek Elections

While analysts at investment banks warn that QE has become inevitable, the ECB and Germany’s government are signaling that they will not act until Greece’s snap elections are complete. Over the weekend, German newspaper Der Spiegel published a story suggesting that Germany is preparing for a Greek exit to the Eurozone. According to the paper, a German government report suggested that the European Union can withstand a Greek exit, and that Greece’s exit from the Eurozone would not endanger the union or the currency.

The leaked report comes after Greece announced snap elections, which many analysts believe will help the main opposition Syriza party, who oppose austerity and have hinted that they would leave the Eurozone if the country is forced to endure further austerity measures by German decree. Already, the IMF has suspended aid to the country after the announced elections. The Syriza party has led polls since May, and some believe they will return Greece to the drachma after winning the election. 

A recent opinion poll saw that Syriza had a 3 percentage point lead over the New Democracy party, a central party whose leader, Antonis Samaras, has been prime minister since 2012 and who has been instrumental in implementing German-led austerity measures.

Greek Exclusion from QE

Tensions between Germany and Greece were aggravated after it was announced that the European Central Bank’s quantitative easing program would involve purchasing only the safest and highest-rating bonds, thereby excluding Greece from direct stimulus. Some analysts believe a QE program will exclude other countries, such as Spain and Portugal, leading to greater tensions between northern and southern Europe.

The ECB has halted any further move on a QE program until Greece’s snap elections are complete, which some critics argue is a form of political blackmail that threatens the country with a pariah status if they do not vote for the right party from the European Union’s perspective. Syriza party leader Alex Tsipras said this weekend at a party rally that the ECB should begin a QE program and include Greece in it; after those purchases, the Greek government would then write off the foreign debt.