News analysis: Italian experts praise QE, warn demand-side stimulus also needed

Italian experts look positively at the European Central Bank (ECB) quantitative easing (QE) program kick-started on Monday, but also warned the move is not enough and must go along with growth policies to re-launch the eurozone's economy.

"The QE has allowed for reducing spread, or the differential between yields of 10-year Italian government bonds (BTP) and their German counterparts, to below 100 basis points," Claudia Segre, secretary-general of Assiom Forex, the financial markets association of Italy, said in an interview with Xinhua.

The Italian spread fell below 90 basis points on Friday for the first time since May 2010. Three-year bonds hit 0.44 percent and seven-year bonds dropped to 1.23 percent at auctions in February.

The positive effects on spreads have also extended to the other eurozone economies, including the peripheral ones whose default risk used to be priced very high, Segre said, citing the example of Portugal, whose spread has shrunk considerably.

"Secondly, markets have already seen the QE effects in the exchange rate drop of the euro against the U.S. dollar," Segre explained to Xinhua. "A weaker euro is absolutely positive as it lessens the risk of the eurozone entering a deflationary spiral," she noted.

She said the fall of the euro has strengthened the investment scenario in the eurozone by making the single currency competitive.

Overall, the adoption of QE by ECB combined with falling oil prices is a "unique occasion" of additional growth for the European Union (EU) and global economy as estimated by recent reports of the ECB and World Bank, Segre highlighted.

In her view, China can also benefit from the ECB move to strengthen its investments in the eurozone by especially benefiting from the weak euro.

"Chinese strategic projects stretching to the EU, such as the commitment to building a Silk Road economic belt to boost international cooperation, would be strengthened by the QE," Segre stressed.

"The QE, together with the European banking union launched last summer, and the current handling of the Greek debt crisis, are three elements that give absolute strength to European markets in a moment of geopolitical troubles for other global markets," she concluded.

Carlo Devillanova, an economics professor at Bocconi University in Milan, warned however that though the QE is an "important signal," it is not effective in addressing the issue of growth in the eurozone.

The Italian central bank said on Monday the QE would increase the size of its balance sheet by 30 percent by September 2016. The total of Italian bond acquisitions will amount to around 150 billion euros (about 163 billion U.S. dollars) including 130-billion-euro buys carried out by the Italian central bank.

"The idea of QE is that by inputting money in the market, credit should be eased and companies encouraged to invest," Devillanova told Xinhua.

But in present times, he underlined, not only Italy, but also the whole of the EU is in what Keynesian economics terms is a liquidity trap: a situation where companies are not investing and consumers hoard money because they expect an adverse future.

"When liquidity traps occur, monetary policy becomes ineffective," he stressed. "Now interest rates are already very low and further lowering them would probably be ineffective to re-launch the economy," he elaborated.

"More credit is a precondition for growth but is not sufficient. It is like trying to get fat by buying a larger belt, as John Maynard Keynes used to say," Devillanova elaborated.

Therefore, he explained to Xinhua, besides QE, a reduction of austerity could be an essential piece of the economic puzzle. "What the eurozone has to do for growth is a demand-side stimulus which needs a perspective change in loosening the too-rigid economic policies of the EU," he said. Endit