ECB survey reveals major flaw with Quantitative Easing
The ECB’s own research reveals a major failure in its quantitative easing strategy: it does not address companies’ most pressing issue: the lack of demand.
The ECB has often justified its colossal QE programme on the basis that it improves financing conditions for businesses. By lowering rates, QE makes it easier for companies and households to borrow money from banks. But is it the main problem being faced by businesses and in particular SMEs?
In its “Survey on the Access to Finance of Enterprises” (SAFE), the ECB precisely aims to find out entrepreneurs’ most pressing problems.
In its most recent edition, the ECB’s survey reveals once again that contrary to the ECB’s objectives, access to finance has been the least of worries for most Eurozone SMEs. Instead, the survey findings indicates that ‘Finding Customers’ emerged as the dominant concern of euro area SMEs (26%, compared with 25% in the previous wave). As this graph shows:
‘Access to finance’, on the other hand, continued to rank as the least important (9%, unchanged). Only SMEs in Greece continued to be disproportionately affected by poor access to finance, with 27% mentioning it as their biggest problem (from 24%).
To be fair, the ECB can rightly claim that QE (and negative interest rates) have successfully managed to improve lending conditions. It also helped to make those lending conditions more equal across European regions. Indeed, all ECB survey results show that financing conditions facing Small and Medium Enterprises (SMEs) are improving.
It’s the aggregate demand, stupid!
But the ECB’s most recent survey results are clear: QE is failing to support businesses where they need it most. The figures expose a serious design flaw to the ECB’s 2 trillion money creation programme and confirm the main criticism we have been making all along against QE.
QE is predicated upon a defective supply-side approach to economics, which completely ignores the importance of aggregate demand and spending in generating economic activity.
This supply-side theory suggests that the primary constraint on a business’s growth is whether or not the business can get access to loans or funding. Businesses are assumed to be standing ready to invest and employ more people, but are held back because they can’t access the funding to do so. Therefore, all that is needed is to improve businesses access to finance and the economy will flourish, the theory goes.
The issue with this approach is that businesses need to access finance only is a constraint only if they face sufficient demand for their goods and services. If aggregate demand is low, that is if people don't buy the things businesses produce then businesses won't seek out new loans.
At this stage in the economic cycle, most businesses are constrained by aggregate demand, rather than by the supply and availability of financing. This logic has been continuously confirmed by the ECB’s own business surveys, since the beginning of QE.
If things continue this way, QE will prove to be a missed opportunity to promote growth where it matters most.
The ECB cannot continue to ignore the reports made by SMEs and needs to start genuinely considering the major obstacles to business. It should then design the most appropriate and effective policy that will help tackle the major problems at hand.
Based on the evidence, it is quite clear that businesses need more spending in the economy – they need to sell more of the goods and services they produce. Policy makers at the ECB need to start considering better and more direct ways of increasing spending, such as distributing a citizens’ dividend or targeting its money creation programme directly towards sustainable investments.