The Italian head of the ECB, Mario Draghi, last week announced he would like to help certain countries in the south of Europe to borrow more cheaply. Subject to ‘strict conditions’, which were instantaneously refused by the Spanish prime minister, countries in Europe would now be able to ask for temporary access to liquidity by having the ECB print money for it via the ECB buy up short-term government bonds on the secondary market. Well, surprise, surprise.
Some key things to say about this that are not easily found in the Australian press:
- It is not clear this plan is legal. Right at the moment, there is a court-case in Karlsruhe where the German constitutional court is examining whether or not the European Stability Mechanism is actually within the rules or not. There is a good chance that it is not. Since the Draghi plan is supposedly going via the ESM, the plan might be dead on arrival. Even if the ESM is legal, you should expect the legality of this plan to also be questioned since it violates the European rule that the Central Bank cannot provide fiscal support to any country, which of course is precisely what it would be doing. You should expect complicated legal wrangling about mandates and the definition of ‘fiscal support’ to rage for months.
- The ECB’s decision to start printing more money has been expected for a while now. Back in December, I already said it was the road of least resistance given the intransigence of the rest of the European political system and many institutions have pushed this same line for much longer. Hence, even if the current plan turns out to be illegal, expect the ECB to print more money in some way or another.
- The number of nonsense plans floating around now in the EU is enormous, most of them completely unworkable. The European Commission for instance wanted the ECB to start regulating all the banks in problem countries. As the German finance minister pointed out, the ECB doesn’t have the capacity to do this even if it wanted to. Indeed, it doesn’t have the capacity to even properly monitor a single large bank and Europe would need a new institution to do even that. So forget about that one, although you should note that it is the European Commission that spouts this nonsense which tells you about their limited understanding of the situation. One of the mistakes many observers make is to presume that the European leaders know what they are doing, whilst for most of them anything to do with finance is magic. Other hot air is all the talk of ‘forcing’ countries out of the Euro. This is complete hot air since there is no legal mechanism to do so and countries will only leave the Euro if they decide themselves to do it.
The European Commission understands one thing very clearly: they need a lot more powers. Under no circumstances are they interested in being constrained by details like laws, nor those awkward people known as “voters”. Beyond this fundamental point they don’t care all that much, because they generally don’t have to. Now, about those new powers… do we need a crisis here, or can we just take what we want?
*wipes sweaty forehead*
Gee I narrowly missed a bullet on that one.
Paul,
If you’re referring to the most recent announcement (ECB’s unlimited bond purchasing) then it will not be a money printing exercise. The ECB stated that they will sterilize the program through a deposit tender process, which means the ECB will take in Euro deposits to match against the bond purchases.
Hi JC,
its is not just me who calls it money printing. So too does Weidman and the Bundesbank.
We have talked about the supposed ‘sterilisation’ before. In my view its been a bit of a scam. In order to ‘sterilise’ the previous round of bond buy-ups the ECB effectively first loaned out cheap money to bank, and then bought it back more expensively. That is not sterilisation, but printing money and sending it to particular people.
Even in principle it is hard to see how one could possibly sterilise an ‘unlimited’ program. Together with the Bundesbank I hence have little faith in that part of the announcement and have hence just ignored it.
Please correct me if I’m wrong, but no Bundesbank official has actually made any statement to that effect since the policy was announced. They did make comments before though, saying they were against QE but not after the announcement.
If they have made statements then I stand corrected however I would then argue that they wouldn’t understand monetary policy.
All the previous ECB operations have been repo tenders. Their first tranche were short term while the December operation was 3 year duration. There is a case to be made these were defacto QE activities, as it’s doubtful the ECB will not renew them when they fall due. In practical terms, because these were temporary ads to the system, you could say they were temporary QE’s.
You need to explain this. As far as I know the ECB’s only operations have been those EU wide repo tenders other than buying up the PIIG debt (I’m not sure if this was sterilized or not, but I do recall reading something about the ECB selling German/ Nothern European debt in order to sterilize.
They actually can with the operation they have announced, as the cash infusion through the bond buying program is directly countered by their deposit tenders. If they’re true to their word they could theoretically buy up all the PIIG debt and then sweep that amount of cash infusion by tendering for deposits.
We’ll see. I have little faith in it being able to normalize things because I’m with Sumner on this. Europe has had a collapse in NGDP and the ECB is basically ignoring what they’ve done and the damage caused. I think the European problem outside of Greece could have been containable. It spread because monetary policy is too tight across the continent and they are responsible for this. They alone.
Tel,
good to hear you were not fooled in the first place! Dont discount the number of respected economists though who pretend to discern some kind of deep super-rational game in the actions of the European politicians though.
Gosh Paul your posts are biased.
The German consitutional court just found that the ESM IS constitutional, so that knocks off your point 1.
Second, the system of banks supervision being proposed is an evolutionary change from what already exists. In 2010 Europe put in place a European System of Financial Supervision that strengthened oversight at the centre through the instiution of the European Banking Authority. Even under the new proposals the ECB would still be working very closely with the national supervisors. You can think of the new system as co-opting the national regulators into a more centralized system with the ECB ultimately calling the shots. Obviously the ECB will need more resources in this area than present to undertake the microprudential tasks being proposed, but that will happen in due course. Will the new system be perfect? No. But given the degree of capital market integration in Europe it seems pretty sensible to have a regulatory structure that is also much better integrated than is currently the case.
More generally, you rely way too much on segments of German opinion for your analysis. The Germans don’t want greater centralization of financial regulation and supervision because they want to retain control of the landesbanks, many of which undercapitalized and probably insolvent. This isn’t particularly surprising given the nefarious relationship these instiututions have with local policiticans and parties in Germany. Indeed, one could argue that those relationships aren’t a great deal different from those that exist between the savings banks and politicians in Spain.
You are right that with full allotment, “sterilisation” is a bit of a sham. But I can’t say I’m particularly fussed with the idea of the ECB printing more money. Financial conditions as broadly constituted are too tight in Europe and the ECB should be doing what it can to ease constraints.
LO,
I agree with much of what you say but think you are too kind to the central European bureaucracy? As I have said in previous posts, it is a mammoth task to truly sift through and contain the operations of big banks, let alone the thousand of small ones in a situation of a large amount of corruption and political networks. Only after a massive cleanup would a central European regulator be able to much, but the initial cleanup is completely beyond it. All you can do from the centre is send money and hope, which adds to the problem. As I said before, the initial cleanup would have to come from national and regional regulators or else a concerted effort from oversees corporate banks given control of many local banks. For reasons we both agree on the politicians don’t want this, either in Germany or Spain, but is still means the central route is pretty ineffective (which is of course part of the point of advocating this for politicians).
As to your point about German opinion, I have been very negative of them. they should never have started down the bailout path. First true reforms, then help.
On money printing I also agree that we need it, but Kai prefer a democratic helicopter drop to what amounts to helping politicians avoid their responsibility.
JC,
A Bundesbank spokesman talked to Der Spiegel. On the issue of sterilisation, I recommend the pieces on this by Zero Hedge.