Well after much criticisms in the December meeting, Draghi has come back with a vengeance. On the outset the package by the ECB looks formidable. But will it spur the EU's economy and bring it back from the brink of yet another deflation?
If we look at Japan, the NIRP has been rather unsuccessful. In what was intended to lower the value of the Yen vs the US$, and in the process ignites Japan's export and fuel growth, we instead saw the Yen appreciating against the US$. Much remains to be seen in Q1 2016 whether the NIRP has successfully pulled Japan out of a potential recession.
Worst still, more than US$5T of Japanese bonds are yielding negative returns. With total debt that is in excess of 500% of GDP and a rapidly changing demographics which could impact upon Japan's future tax revenue, how can Japan ever pay off this huge amount of debt? Were Japan to stop borrowing, it would take 16 years of tax collection to pay off the debt load.
Despite a good observation of Japan (Heck, Japan has implemented countless QEs over the last 25 years and they are still in a deflation cycle), the ECB continues to adopt the same rules from the same playbook.
Likely, it will prompt people to pull money out from the banks just like what happened in Japan where safety boxes were sold out! It could also prompt the people to invest in precious metals since having zero interest return is still better than negative returns.
So if people save more, what will happen to consumption - the driver of economic growth?
Should this happen, then it is a conclusive proof that the people have lost complete faith in the ECB.
The EU is faced with a multitude of problems. Besides the deflationary pressures, the EU is also facing a migrant crisis, which is causing some disunity among the various fractions within the union, the southern countries which continue to face severe economic and financial crisis, most notable Greece and Italy, and a potential BREXIT come June, all of which could result in dramatic shifts within the union.
This could be a trying period for the ECB and EU, as a group of German banks is adamant in voicing support for the ECB's policies, and the EU is being confronted by a wave of nationalism and patriotism within several of its member countries that depart from the EU's agenda.
Will what the ECB embark on be any different from Japan? I have my doubts and I would like to be proven wrong, because being right scare the hell out of me.
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