Maybe it is the seasonal spirit. I feel like someone who got almost everything I ever wished for. When the eurozone crisis erupted, I asked for an emergency backstop from the European Central Bank. Then I demanded a banking union, and then a large investment programme. Each time, Europe’s policy makers said yes. I wanted quantitative easing, the purchase of sovereign bonds by the ECB, which has not happened yet but probably will next month. The eurobond was the only thing I did not get.

The score is four of five. So why am I still not happy? The answer is that I feel robbed. It was only an illusion. I did not get a single thing.

The banking “union” will be one in which each country is responsible for its own banking system. The most important structural innovations are joint banking supervision and a tiny fund to cover losses when a banker runs away with the till. When I asked for a co-ordinated approach to dealing with failed banks, this is not what I meant.

It looks as though the same is going to happen with QE. I am sure the financial markets will celebrate the decision. The euro will fall — until somebody reads the small print. The compromise under discussion allows creditor countries to wash their hands of any risk. The idea is that each national central bank buys the sovereign bonds of its own country — and if this results in losses, the national government in question makes the central bank whole. Think about that for a second. Italy’s government borrows money, the Bank of Italy buys the debt and the government promises to compensate the bank if its bonds fall in value (for instance because markets stop believing the government’s promises). The circularity is preposterous.

If the ECB goes down this route, it will be the end of a single monetary policy. Yet the eurozone is supposed to be a monetary union, not a fixed exchange-rate system where everybody happens to use the same notes and coins.

The mooted compromise would also limit the size of any QE programme. There is only so much risk that the cash-strapped governments of the eurozone’s periphery can absorb. They are unlikely to be able to do enough to anchor inflation expectations at the ECB’s target of just under 2 per cent.

I understand that this compromise is still being discussed. No decision has been taken, and not everybody agrees. It is not clear to me why central bankers in favour of QE would accept it.

They might, I suppose, reason that an inadequate QE programme is better than none at all. If so, they are wrong. The habit of accepting half-baked solutions is the reason why the eurozone is in its present mess. Governments accepted permanent austerity in return for emergency cash in the crisis years, but that policy only ended up enlarging the burden of government debt. A flawed QE programme would likewise be, not a small step towards a solution, but a big step away from one.

It is important to be clear about the reasons why QE is needed. There are two possible rationales.

One would be to monetise debt — turning it into a bond that pays zero interest and is destined never to be repaid. This would work, and it would bring economic benefits. It would also be totally illegal, under both the Maastricht treaty and German domestic law.

The other reason for conducting QE — and the only one that is legally acceptable — is to help the ECB achieve its price stability target.

One can have a long discussion about what that means. But a QE programme would have to be open-ended if it were to have any chance of producing this effect. You can either say: “Whatever it takes.” Or you can say: “No more than such and such billion euros.” But you cannot say both at the same time, and expect people to believe you.

If an incoherent compromise is the only option available, it should be rejected. The eurozone cannot afford another botched policy measure with dubious benefits and considerable side-effects.

If they decide to do nothing, central bankers will at least keep this barrel of powder dry. A delayed but well-aimed blast of monetary stimulus is far better than a premature sputter from the ECB’s cannons. I fear, however, that accommodating Germany will be the overriding priority.

The resulting policy might be wrapped up in language that makes it look like what I asked for. But the resemblance is superficial. That is the trouble with trying to please everyone. It forces you to take decisions that are pragmatic and realistic — even if they are wrong.

munchau@eurointelligence.com

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