European stimulus packages could backfire

By Killian Plastow
 — 1 minute read

Initiatives led by the central banks of Europe and the UK to stimulate growth and “ease the market’s fear factor” may be a double-edged sword, according to Columbia Threadneedle.

In a statement, Columbia Threadneedle's global chief investment officer, Colin Moore, supported the decisions made by both banks to provide liquidity following the UK’s vote to leave the European Union, but cautioned that further stimulus could be counterproductive.

Mr Moore warned that taking “extraordinary measures” to encourage investor confidence is likely to be an ineffective approach since such measures may undermine the confidence they are trying to support.


“You're saying to someone, ‘I'm creating these extraordinary measures, creating negative interest rates in some countries, but you should feel confident about going out and building a new factory or hiring new people. I want you to invest in the future even though I'm telling you that I'm creating extraordinary measures to combat a potential crisis’.

“Those two are just not behaviourally consistent,” Mr Moore said.

While the recent 'stress tests' undertaken by European banks were “encouraging”, the results still need “a lot more scrutiny”, he added.

"We are looking to identify the weakest banks; we don’t want to expose our investors to them, either through our investments or the use of those banks as counterparties," said Mr Moore.

“A second consideration is the potential for contagion. If one of those banks goes down, even though we don’t have direct exposure, it may influence or damage other banks that we do deal with in Europe."

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