It’s a forgone conclusion in the markets that the European Central Bank will soon roll out a quantitative easing program—buying government bonds with newly printed money. Yesterday’s legal ruling paves the way for no less—a lawyer at the European Court of Justice said that the ECB’s bond-buying program doesn’t run afoul of EU law. But otherwise the subject of the ECB and QE is morass of uncertainty. In fact, it’s fair to say that the outlook for what can be achieved with the next phase of monetary stimulus, and how it will proceed, is a tangled web of unknown unknowns at this point.

The main questions: Will QE revive the Eurozone’s stagnant economy and how will the ECB implement the program? Let’s start with the easier question first—what will QE deliver on the macro front?

The short answer… not much, at least not much by the comparatively high standards of the Fed’s moderately successful QE of recent years. Sure, the Eurozone could use a muscular dose of QE. With headline consumer inflation falling 0.2% on a year-over-year basis through December—far below the ECB’s roughly 2% target–the euro area is a textbook case of an economy in need of a central bank assistance on nipping deflation in the bud. That’s no trivial goal. If the deflationary trend deepens, Europe’s macro challenges will increase beyond the already trouble profile we’ve seen in recent years. Success on this front is essential, and one that QE, assuming it’s designed properly, can deliver… even at this late date. By contrast, expecting QE in Europe to juice growth by any meaningful degree is another matter.

A crucial stumbling block is the already low level of interest rates in Europe. Rolling out QE at this point will have much less impact compared with what could have been achieved several years ago. For instance, consider interest rates. When the Federal Reserve in late-November 2008 announced the first phase of QE—buying up to $600 billion of mortgage-backed securities—the benchmark 10-year Treasury yield was relatively high—in the low-3% range at the time—compared with rates in Europe at the moment (Germany’s 10-year yield is currently around 0.50%). As such, the potential for juicing growth by slashing rates is far less attractive in Europe today vs. the US in late-2008.

The ECB, quite frankly, has waited too long. Better late than never, but the inertia has come at a price. There are political reasons for the ECB’s reluctance to embrace QE sooner (i.e., Germany favors austerity and low inflation for Europe). But whatever the explanation, the ECB has effectively dithered while the disinflation/deflation momentum has increased and so the problem is far bigger. As a result, the ECB’s efforts will have much less traction in the real economy today compared with what was possible six years ago.

The bigger mystery about QE in Europe: How will the program be structured? This is a big unknown, although the details—once they’re outlined, perhaps as early as next week at the ECB’s monthly policy announcement and press conference—could have a major impact on results, for good or ill. Unfortunately, there are a myriad of design possibilities, which means there’s lots of uncertainty. There’s one central bank in Europe, but there are 19 series of sovereign bonds. The New York Times outlines the challenge:

Should the European Central Bank buy bonds from all 19 eurozone countries, and in what proportions? If from all eurozone members, then how should it handle Greece? The country is poised to elect a new government that could repudiate some of the billions of euros of loans the country owes as part of its international bailout. And how to keep the Germans on board?…

The simplest and most likely option would be to buy bonds in proportion to each eurozone country’s share of the central bank’s capital, which is calculated according to each member state’s population and gross domestic product.
The drawback to this method is that it would mean buying large quantities of German government bonds, which are already in heavy demand — so much so that on Wednesday the yield on the 10-year German bond reached a new low.

Germany accounts for 18 percent of the European Central Bank’s capital, more than any other country. (Malta, with 0.65 percent of the central bank’s capital, has the smallest share.) Market interest rates on some other German government bonds are already below zero. So it is not clear what purpose, if any, would be served by pushing the rates even lower, as would happen if the European Central Bank started buying.

Given all the complication and the associated uncertainty, a number of analysts think the ECB will only announce its QE intentions next week but leave the details for another day. If so, the already muddled realm of European QE may sink deeper into the cloud of uncertainty. That’s a big risk for Europe as well as the global economy. Unfortunately, the risk may get worse before it gets better.