In 2012 European Central Bank chief Mario Draghi brought the most acute phase of the euro zone emergency to a close by promising to buy the sovereign bonds of stricken countries in unlimited quantities to keep them in the single currency. The pledge did the trick, though Draghi didn’t spend a cent. Now he has promised again to buy bonds. But this time the money is for real. More than €1 trillion will be spent by September 2016.
What are we to make of this? The move comes no fewer than six years after the US Federal Reserve embarked on its first quantitative easing (QE) campaign and long after similar endeavours by the Bank of England and Japanese central bank.
The belated new plan must be seen through the prism of the ECB’s habitual reluctance to engage in such policies and the inevitability of friction with the economic establishment in Germany.
Dire scenario
With all of that in mind, it follows that the situation in the euro zone must be pretty bad – and set to worsen – to stir the Frankfurt-based institution to move now.
Growth is on the floor, declining prices have prompted anxiety about deflation, and underwhelming results from ECB interventions to buy covered bonds and asset-backed securities only added to the clamour for more assertive action.
In the end, the QE package was a good deal larger than anticipated. The message went out days ago that €600 billion was in play – the final sum was almost twice that amount.
In question now is whether banks release the money realised on their sovereign bond holdings to boost lending. While that is in doubt, governments around the euro zone will benefit as the interest on bonds acquired by the ECB comes back to them via dividends paid by their national central banks.
“This is a boost for the fiscal position of governments all over Europe. Governments would therefore use that by loosening up on austerity,” said Prof Alan Ahearne, head of economics at University College Galway.
All of this has a big bearing on the situation in Ireland, where economic growth is advancing at the fastest rate in Europe.
That’s no thanks to Europe’s stagnancy, rather a reflection of the benefit Ireland is taking from the recovery of the American and British economies.
Europe’s fragility leaves Ireland vulnerable – a decisive turnaround in the single currency area is required to reinforce the domestic recovery. Thus the debate in Frankfurt – centred as it is on arcane economic concepts – is not to be seen in the abstract.
The latest ECB manoeuvres will deliver a fillip to the public finances, playing into the Government’s hand this year and improving the outlook for the final budget of its mandate next October.
For weeks we have seen replay upon replay of earlier acts in the debt saga as an assortment of ECB policymakers took their arguments to the German media.
The impression formed was that Draghi’s pro-QE camp believed the naysayers of Berlin and the Bundesbank wanted clear evidence of deflationary chaos before their very eyes if they were to allow the ECB to act.
This was seen as too lax by half on the other side, the argument being that the low inflation is already bad enough and that deflation itself is doubly difficult to reverse once it becomes entrenched. With the price of oil on the slide, it appears that fear of deflation rather than the thing itself was the decisive factor.
Hyperinflation dismissed
Draghi was ready with his answers yesterday when the inevitable questions came. He was unperturbed when asked whether the move would lead to asset price bubbles, untroubled by concern about limited mutualisation in the QE plan, and made light of anxiety the initiative could lead to hyperinflation.
The euro zone’s problem was a lack of inflation, he said. Citing dire warnings of inflation issued after previous ECB interventions, he suggested such warnings might in future come with a statute of limitations.
These are difficult days. The latest intervention brings with it something close to certainty that QE will continue right until the fourth quarter of 2016. At that point, the bank would be within a whisper of the 10-year mark since emergency interventions undertaken during the Northern Rock debacle in 2007. That’s rather a long time ago now, yet still the tumult continues.
