Euro tumbles and bonds surge as German leaders finally back QE

Political leaders gave an unexpectedly positive response

Germany’s political leaders gave an unexpectedly positive response to the European Central Bank’s money-printing blitz yesterday, further boosting sentiment in financial markets.

Speaking at the World Economic Forum in Davos, Wolfgang Schäuble, the German Finance Minister, said the Frankfurt-based central bank was doing its job “very well”, despite anxiety in the eurozone’s dominant member about the potential consequences of the quantitative easing programme.

“Monetary policy is up to the ECB and they are doing their job very well,” he said. The lack of opposition from the famously hardline minister helped the euro down to a fresh 11-year low against the dollar of $1.12, while the pound hit its highest level against the single currency since February 2008 – €1.33.

The comments make it more likely that the central bank’s stimulus will be implemented by Frankfurt with conviction.

Eurozone sovereign bond yields also fell further, with Spain’s 10-year borrowing costs dropping to a record low of 1.23 per cent. Italian yields fell to 1.41 per cent. Greek yields also declined, despite Sunday’s crunch election.

On a visit to Italy, which is in its third recession since the financial crisis, the German Chancellor Angela Merkel stressed that monetary stimulus was no substitute for structural reforms.

“No central bank in the world will be able to replace politics,” she said. Referring to the sort of labour-market reform programmes being pushed by her host, the Italian leader Matteo Renzi, she said that “political leaders have to live up to their responsibilities”. But Ms Merkel refrained from airing doubts about the decision by the ECB to inject €1.1 trillion into the deflation-hit economy.

The reaction in the German media has been hostile. Bild responded to the decision with the headline, “Are the ECB’s bankers making our money kaput?”. One German MP is launching legal action against a programme, which he insists is prohibited under European law.

The President of Germany’s Bundesbank, Jens Weidmann, who sits on the ECB’s governing council, said in an interview published today that the policy carried “risks” but he did not criticise the operation, which will involve €60bn of asset purchases a month up to September 2016.

In a likely concession to the concerns of Germany and other northern eurozone states, only 20 per cent of the default risk of the bonds purchased will be borne by the eurozone collectively. The remaining 80 per cent will stay with national central banks that buy the bonds.

The French President, François Hollande, gave a warm welcome to QE. Speaking at Davos, he said that the stimulus programme was a “very important step to inject liquidity into the markets”.

But George Soros, the billionaire hedge fund manager, warned yesterday that QE was likely to exacerbate European inequality. “It will benefit the owners of assets. Wages will remain under pressure, through competition and unemployment. This will reinforce a major concern between rich and poor. It will have political consequences.”