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So now we know. Mario Draghi has again proved his authority as European Central Bank president, having pulled off a bigger programme of asset purchases — quantitative easing– than anyone thought was politically possible.
He has also again proved himself to be quite a trickster. In three ways, he has elegantly eluded millstones that, if many observers are to be believed, would limit the effectiveness of QE.
First, many have argued that QE will not work in the eurozone. Now, the programme is bigger than expected. The ECB will purchase at least €1.1tn worth of investment-grade bonds. That packs quite a punch. Many observers had expected something like half that amount. At a first approximation, that means the mechanical effect QE will have on the European economy should be twice as strong – though of course how big the effect is in the first place is disputed, and two times nothing is still nothing.
But by coming in with a number above expectations, Mr Draghi is pulling off a confidence trick – and I mean that positively. He understands animal spirits. In his press conference, Mr Draghi emphasised the effect QE will have on inflation expectations. Recall how in 2012 he changed the mood in the market about the prospect of eurozone disintegration with his promise to do “whatever it takes”, before giving any technical details of what became Outright Monetary Transactions. He now clearly hopes that beyond the mechanical effects of QE, lowering yields, increasing banks’ cash reserves, the simple fact of new ECB action will make people more optimistic about the future and change their behaviour accordingly. Offering a bigger package than anyone dared to hope for clearly contributes to this.
Second, the ECB president has given in to the German demand that national central banks should hold most of the purchased assets on their own balance sheets. This has been billed as the end of “risk-sharing” and even the IMF managing director thinks it will make QE less effective. Mr Draghi himself went out of his way to dismiss the relevance of where the risk is notionally placed. You are all making too much out of this, he told journalists, and implicitly German central bankers. Astonishingly he allowed himself to speculate about the effects of a sovereign default; since “by and large most national central banks have adequate [capital] buffers, nothing would happen”. The message could not be clearer: the “demutualisation” of risk is an economically irrelevant trick that solved the political problem of Germany’s scepticism about QE. As it happens, Mr Draghi is right about this, if only because a loss on sovereign paper can always be recovered by withholding the relevant government’s share of ECB profits. And the German sceptics on the ECB governing council surely understand this too. So here is a political stitch-up with entirely salutary economic effects.
Third, the recent preliminary verdict from the European Court of Justice on OMT specified that any bond purchases by the ECB must be limited to the extent necessary to maintain the existence of a functioning market in the bonds. Mr Draghi’s unimpeachable answer is to go ahead with a purchase programme that for all practical purposes is unlimited, but limit how much the central banks can hold of each bond issue (25 per cent) and from each issuer (33 per cent). This seems entirely arbitrary, and more importantly – since total eurozone government debt is more than €9tn – it would allow the ECB to do a lot more than it has just promised to do.
More proof, if any was needed, that the Super Mario moniker is well deserved.
Martin Sandbu writes Free Lunch, the FT’s new daily premium newsletter on global economics. In tomorrow’s email he will cover the QE decision in greater depth. Click here for samples of Martin Sandbu’s Free Lunch and to register your interest in receiving it.
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