ECB may roll out heavy ar­tillery against de­fla­tion


After a breath­less year of ac­tion and now a new po­lit­i­cal cri­sis in Greece, the Euro­pean Cen­tral Bank (ECB) may fi­nally roll out its heavy ar­tillery in 2015 in its bat­tle against de­fla­tion, an­a­lysts said.

Bank watch­ers say new elec­tions due in Jan­uary in debt-mired Greece may prove un­set­tling for Euro­pean part­ners but should re­main man­age­able for the eu­ro­zone as a whole.

This will mean the ECB’s over­rid­ing chal­lenge in the New Year will con­tinue to be to pre­vent the sin­gle cur­rency area from slid­ing into de­fla­tion, a dan­ger­ous down­ward spi­ral of fall­ing prices.

“I see a broad con­sen­sus around the ta­ble in the gov­ern­ing coun­cil that we need to do more,” ECB ex­ec­u­tive board mem­ber Benoit Coeure said re­cently.

So far, the ECB has rolled out a wide range of mea­sures to try and get eu­ro­zone in­fla­tion back up to the level of 2 per­cent that it re­gards as eco­nom­i­cally healthy.

It has cut its in­ter­est rates to new all-time lows, made un­prece­dented amounts of cheap loans avail­able to banks via its LTRO and TLTRO pro­grams, and em­barked on as­set pur­chase pro­grams (ABSs and cov­ered bonds) to pump liq­uid­ity into the fi­nan­cial sys­tem.

But at 0.3 per­cent, area-wide in­fla­tion is still alarm­ingly low and could even fall fur­ther as a re­sult of fall­ing oil prices.

So the ECB is cur­rently ex­am­in­ing the pos­si­bil­ity of so-called quan­ti­ta­tive eas­ing or “QE.”

This is the large-scale pur­chase of sov­er­eign debt, a pol­icy hith­erto pur­sued by other cen­tral banks around the world to kick-start their moribund economies, but which the ECB has so far shied away from.

In Europe, crit­ics of QE — not least the mighty Ger­man cen­tral bank or Bun­des­bank — see it as a li­cense to print money to get gov­ern­ments out of debt, which the ECB is strictly for­bid­den from do­ing un­der its statutes.

Nev­er­the­less, most ob­servers be­lieve the ques­tion is not “if” but “when” such a pro­gram will be on the cards, pos­si­bly as early as Jan. 22 or the sub­se­quent meet­ing on March 5.

Una­nim­ity Not Needed

Bun­des­bank pres­i­dent Jens Wei­d­mann is an out­spo­ken op­po­nent of QE, which he ar­gues would take the ECB way out of its cur­rent le­gal re­mit.

In a news­pa­per in­ter­view at the week­end, Wei­d­mann warned against see­ing QE as a panacea for the eu­ro­zone’s ills.

“Dis­ap­point­ment is in­evitable. And the real na­ture of the prob­lems risks get­ting lost from sight,” he told the Sun­day news­pa­per Frank­furter All­ge­meine Son­ntagszeitung.

Ger­man Fi­nance Min­is­ter Wolf- gang Schaeu­ble agreed, ar­gu­ing that “cheap money should not be al­lowed to dent the re­form zeal in some coun­tries. There is no al­ter­na­tive to struc­tural re­forms — if things are go­ing to im­prove again.”

But ECB chief Mario Draghi in­sisted in De­cem­ber that “we don’t need una­nim­ity” on the gov­ern­ing coun­cil and a pro­gram of QE could be de­signed in such a way to win con­sen­sus.

Com­merzbank economist Michael Schu­bert said Draghi and his sup­port­ers had their work cut out for them in con­vinc­ing the gov­ern­ing coun­cil to support QE.

Nev­er­the­less, some an­a­lysts be­lieve that while large-scale bond pur­chases may have worked for the United States and Bri­tain, the dif­fer­ent eco­nomic and le­gal set-up in the eu­ro­zone meant that QE would not be the cure-all that many hope it will be.

“It is im­por­tant to note that the sov­er­eign bond pur­chase pro­gram as a stand-alone is un­likely to have the di­men­sions of the U.S., Bri­tish, or let alone Ja­panese pro­grams,” said Beren­berg Bank economist Christian Schulz.

UniCredit economist Erik Nielsen warned that too much was be­ing ex­pected of the ECB, which has re­peat­edly taken on the role of fire­fighter in the long years of the eu­ro­zone cri­sis while politi­cians have been re­luc­tant to push through tough but un­pop­u­lar struc­tural mea­sures.

The new cri­sis in Greece, where a rad­i­cal anti-aus­ter­ity party looks set to win snap elec­tions and pos­si­bly undo many eco­nomic re­forms, would likely re­main man­age­able for the eu­ro­zone as a whole, an­a­lysts said.

“Europe has built up its de­fenses against con­ta­gion risks with the (Euro­pean Sta­bil­ity Mech­a­nism) support funds and the readi­ness of the ECB to do what it takes to keep all re­form coun­tries in the euro,” said Beren­berg Bank economist Hol­ger Sch­mied­ing.

“A tragedy for Greece would prob­a­bly not turn into a sys­temic cri­sis for the eu­ro­zone as a whole,” he in­sisted.

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