When Mario Draghi announced two years ago he would do “whatever it takes” to save the euro, he must have known that some of his fiercest critics would be fellow policy makers inside the European Central Bank.
Mr Draghi has impressed with his ability to corral support within the bank’s governing council despite some strident opposition. He should continue to do so. The ECB is right to push ahead with unconventional monetary easing, and its sceptics should give way.
The need to act remains acute. That the eurozone economy exceeded forecasts by expanding 0.2 per cent in the third quarter of the year merely underlines how pitiful those expectations have become. This week France joined the club of eurozone countries with 10-year government bond yields below 1 per cent, while Germany’s hit a record low. This is a currency zone heading towards deflation, and pulling it back from over the brink will be much harder than arresting its slide.
As Mr Draghi has repeatedly emphasised, anchoring expectations to a stable and positive inflation rate remains vital. This month, his efforts began to bear fruit. The ECB started to buy covered bonds outright in response to the weakening growth and sliding inflation within the eurozone. Mr Draghi talks of returning the ECB’s balance sheet to its size in early 2012, which implies buying €1tn worth of assets.
Yet as the remedies have become more unusual, so some of the opposition has become more vocal. Jens Weidmann, the Bundesbank president, has emerged as the most prominent member of a faction of doubters. He regards setting a balance sheet target with great suspicion and purchasing sovereign debt outright as beyond the pale.
It is certainly true that the magnitude of the effect of asset purchases is unclear. Post mortems of the US experience with quantitative easing disagree both on the impact of the overall package and on the relative contributions of the purchases of different assets. Debates also continue about the mechanism by which QE can affect growth. Candidates include pushing investors out of safe assets into riskier ones, increasing expectations of inflation and freeing up clogged credit channels to boost bank lending.
Yet it is hard to argue that QE has not worked at all. The superior recoveries of the US and the UK, the economies that tried it soon after the financial crisis, suggest the effect was positive.
The implication of past experience for the ECB is that purchases should be experimental and open-ended. The bank may be wise just for the moment to focus on buying private instruments such as asset-backed securities and corporate bonds rather than government debt. Given that the eurozone remains more dependent on bank finance than on capital markets and that sovereign debt yields for the core economies are already low, the efficacy of buying government bonds is questionable. Certainly, purchasing sovereign debt should not be fetishised as “real QE” compared with the private asset alternatives.
But nor should buying government debt be ruled out. The effect of trying whatever it takes may raise expectations of inflation and growth by itself. The new year would be a good time for the ECB to assess how the programme has worked and, if needed, extend it to other types of assets.
Mr Draghi’s achievements in dragging the ECB towards monetary easing proportionate to the problems of the eurozone have been considerable. Yet inertia is such that it remains well short of what is required. Mr Draghi is heading in the right direction. His colleagues should follow.
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