President Mario Draghi of the European Central Bank (ECB) promises to add monetary stimulus if the economic outlook doesn't improve. One of the options to do so is to resume the Quantitative Easing (QE) programme. In an opinion in Het Financieele Dagblad, Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed income in the Global Investment Center of the Private Bank of ABN AMRO, says that the proposal of Draghi to resume the QE-programme is very alarming.
The reason why the words of ECB President Mario Draghi are so alarming is because the QE-programme undermines the disciplining functioning of the bond market. This is an unintended side effect of the programme, that we have witnessed in practice when the ECB started with it. As the ECB buys government bonds, interest rates on government debt will decrease and this stimulates economic growth. As the economy grows harder and the debt grows slower, the debt as a percentage of GDP will decrease and this allows countries with high levels of debt to outgrow these. However, when an economy gets stimulated by the ECB, the government of the country itself does not have an incentive any longer to adopt measures themselves which structurally improve their economy.
At Erasmus School of Economics, research has been conducted about the consequences of the QE-programme on market conditions. Preliminary results show that the tradability of government bonds becomes skewed if traders know there is a big player - such as the ECB - active in the market for government bonds. According to Professor Mary Pieterse-Bloem, it is expected that this has a significant effect on the exchange value of bonds: As a result, the disciplinary effect of the bonds market will strongly diminish. Thus, if Draghi's words are translated into actions, we should look for an another approach to encourage countries within the eurozone to undertake the necessary reforms for their economy.
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On 28 June 2019, Prof. dr. Mary Pieterse-Bloem publicly accept her appointment as Professor of Financial Markets at Erasmus School of Economics and held her inaugural lecture in the Aula of Erasmus University Rotterdam.