The ECB schism

You might think that enough has already been written about dealing with deflation and unconventional monetary policy tools.  But apparently not enough to settle the question of whether the European Central Bank should in fact further cut interest rates and shift to quantitative easing i.e. outright purchases of debt.  This Bloomberg story puts names on who is arguing for what, with an extended Hellenic phalanx (George Provopoulos, Athanasios Orphanides and Lucas Papademos) pushing for quantitative easing but the Bundesbank’s Axel Weber arguing that the ECB is already near its limits on any type of loosening.

The latest Eurostat inflation data might concentrate minds, showing annual Eurozone inflation of 0.6% and several countries already in deflation.  But if the cautious EU countries thought that the G20 enhancements to the IMF would bail out them out any further anti-crisis measures, that money to eastern Europe needs to start flowing soon.  Note: the only big announcement since the G20 is the facility for Poland, and that’s a precautionary facility.   The ECB can’t dodge this issue forever.

4 thoughts on “The ECB schism

  1. Interesting comment.

    But : Provopoulos never said what has been attributed to him, and you can find the Bank of Greece announcement on Bloomberg as well.

    Papademos was speaking on a theoretical basis and did not seem to advocate any action in purchasing bonds.

    Finally the case of Orphanides is an odd one: Great academic credentials , but he was one of the intellectual heavies in the late Greenspan and early Bernanke FED, so hardly a time of distinction for the intellectual leadership of the FED.

    Isn’t it hypocritical for the people pouring scorn on Greenspan to still advocate his policies and to support the views of Orphanides?

    Is the logic of your comment that since the US are applying wrong policies then everybody will have to do the same as well?

    Finally you mention that only one IMF package has been announced. Apart from the fact that this is factually wrong ( Mexico announced that they will ask and probably will get one) doesn’t this show the desperate desire to solve problems that were built over a decade withing two weeks?
    Easy solutions like mispricing the cost of money got us here and they will not get us out.

  2. Well, so much the better if disbursments never take place…it would mean that there would be no need for help.
    BTW Ukraine also got the terms of its IMF loan changed favourably.

  3. With regard to the controversy over interest rate cuts and quantitative easing, the position of the Bundesbank has actually been voiced by many inside and around the ECB recently and has its fair share of good points.

    The Fed has an easier life cutting rates to zero than the ECB, partly because if it then goes on to use quantitative easing it can be indemnified for subsequent credit losses by the Treasury. The same is true for the Bank of England. By contrast, the ECB has no central coffers to fund its losses.Moreover, one should not underestimate the challenges faced when operating in a market composed of 16 different countries. This element is especially important since , as you mention, one of the main instruments of quantitative easing is direct debt purchase. In the European case, however, buying government bonds is an option the ECB is pretty much obliged to rule out, since it might raise fears that the Bank is financing budget deficits. Moreover, which countries’ bond should the ECB purchase , especially at a time when we witness a massive widening of spreads on some eurozone bonds compared with German bonds amid fears that public spending is spiralling out of control?

    The issues at stake when it comes to considering further loosening of monetary policy by the ECB are even more complex than in the US case. The cautious approach to further expansion called for mainly by the Bundesbank should probably be better motivated than with vague references to the risk of a “liquidity trap” but is certainly worth attention, especially since it has proved so far to be very pragmatic and flexible enough to give way to more aggressive steps when necessary.

Comments are closed.