The QE of the ECB

Note kindly translated by Anne-Marie de Grazia

And so it is. Mario Draghi has resorted to its famous « bazooka ». The announcement he made on Thursday, January 22 will go down in history. The European Central Bank converted itself to  « quantitative easing » (or QE for the insiders). But it is a desperate measure. Nothing proves that it will have the effects hoped for. Moreover, it raises many questions. In one way, one may even fathom in it, and this may well be the most important point, the beginning of an acknowledgment that the Eurozone is no longer functioning and that it might be suitable to prepare for its dissolution.

What has actually been announced.

In his press conference, Mario Draghi made a series of announcements, which can be summarized as follows:

  • –       The ECB has decided to launch a program of extensive securities buying, which is bunching together, but also exceeding the programs previously announced (TLTRO). This program, which will start to be implemented in March and is to be continued until September 2016 will consist in the purchase of public and private bonds securities on the secondary market for a volume of up to 60 billion euros a month.
  • –       This program was decided upon because of the collapse of inflation and of the risks deflation presents for the Eurozone.
  • –       It will be implemented according to a proportionality rule in accordance with the contribution of each country to the ECB system.
  • –       The ECB will coordinate the purchase of securities which will be implemented within the limits indicated by the National Central Banks (NCB). The risk-taking will  be covered to the amount of 20% by the ECB within the framework of a solidarity principle on the scale of the Eurozone, and the rest is to be carried by each of the Central Banks concerned.
  • –       The bonds purchased can have a maturity of up to thirty years.
  • –       This program must not incite governments to lax budgeting.

Operators on the financial markets had expected these measures but the vastness of the program favourably impressed them. The total amount of this « easing » is reaching 1,140 billion. The Euro started a downward movement in regard to the US Dollar. But other details must also be taken note of, in particular, the rule of proportionality in the purchase of debt (implying that three countries will profit most, Germany, France and Italy) as well as the rule of solidarity, which is limited to 20% of purchases.

A desperate measure ?

One may well ask if this announcement made by Mario Draghi is not one very last measure desperately seized upon in the face of the evolution of the economic, but also of the political situation of the Eurozone. Let’s remember facts:

  1. Mario Draghi had brandished the threat of such a course of action since September 2012. If one keeps to the credibility theory at the base of the declaratory policy of the ECB, this threat had been made in order not to be applied. It was meant to discourage decisively the speculators and all those who anticipated a possible dissolution of the Eurozone. However, one must recognize that after about one year during which he was believed on his word, Mario Draghi’s credibility deteriorated, at first slowly, then ever faster. So that the last measure aimed at the banks and dating back to September 2014, and which was called the « TLTRO » has been a failure. This loss of credibility is an important sign of the crisis the Eurozone is going through.
  2. The mechanisms allowing this quantitative easing to relaunch inflation and, through it, economic activity are not clear. Indeed, Europe is not the United States and even there the results of the QE1, QE2 and QE3 were mixed, to say the least.
    • The role played by credit in consumption and investment is considerably less important in Europe as it is in the United States. If the announcement of this easing is certainly going to whip up the securities market (the stock market in particular) and reinforce the banks and other financial institutions, possession of these securities in the portfolios of households is limited. So that no real wealth effect will be produced, which could dynamize consumption.
    • If the decrease of the Euro in relation to the US Dollar is a good thing, we must remember that the countries of the Eurozone, with the exception of France, do between 60% and 70% of their trade within the Eurozone itself. The depreciation of the Euro in relation to the Dollar will therefore not have the same effects in re-launching activity as a dissolution of the Eurozone would have, accompanied by more or less important devaluations of the countries of Southern Europe in relation to Germany.
  • 3. There is a contradiction between the declaration made by Mario Draghi about the necessity to maintain strict budgetary policies and this « easing. » In fact, when faced with the risk of deflation, it is by way of a budgetary policy and not by way of a monetary policy that one fights against a recession and a deflation. The main problem in Europe is the dwindling of the share of workers’ salaries in the value added.

We notice therefore that, however spectacular it may be, this announcement is an answer to a question that had not been asked. In fact, monetary easing would be coherent if one were facing a crisis of liquidities, as we did in September 2008. But this is not the case at present.

 

The end of the Eurozone?

There is one point deserving to be analysed, it’s the decision to limit the solidarity mechanism in the face of risks to 20% of purchases. This means that, for 80% of these same purchases of securities, the risks will have to be carried by the Central Bank of each country in consideration. However, the principle of mutualisation is at the base of the functioning of the Eurozone. We must recognize that we have regressed today to the situation of 1999, meaning, to the moment when the Eurozone was implemented, as far as mutualisation is concerned.

  • –          There has been since 2010, a very important movement of renationalisation of the debt (which one can see in the TARGET-2 account), signifying the end of the single market of debts within the Eurozone.
  • –          Henceforth, we know that this mutualisation will only apply to 20% of the purchases of securities to come. In other words, the Central Bank of Italy will carry 80% of the risk for Italy, the Central Bank of Greece 80% of the risk for Greece, and so on.
  • –       Finally, nobody noticed that Mario Draghi carefully avoided announcing an immediate implementation of his program and that he pushed it back to March. There is a simple reason. He is waiting for the European Court of Justice to give him a green light. However, the opinion of the attorney general, which is by no means a judgement, stipulates clearly that the application of a program of the ECB (in this case, the OMT) must respect the principle of proportionality and must not interfere with the establishment of a (fair?) market price for the securities eligible for this program. [1].

A possible interpretation of the measures taken by Mario Draghi could be that they might represent a desperate action from one part of the ECB which, faced with the amplitude of the crisis, is looking for a solution at any price, be it a temporary one. But, in so doing, this fraction of the ECB has just opened the door to a renationalization of the monetary policies of the member countries of the Eurozone. It is probable that this was not what was aimed for. Nevertheless, it will become more and more difficult for the politicians of the Eurozone to pretend that we are in a federal system, when the monetary policy is becoming national again. For this reason, and for this reason only, it befits to welcome the monetary easing measures announced by Mario Draghi with a certain amount of satisfaction.


[1] « OPINION OF ADVOCATE GENERAL CRUZ VILLALÓN » Cas 62/14, article 263, 14 January 2015, http://curia.europa.eu/juris/document/document_print.jsf?doclan…eIndex=0&part=1&mode=req&docid=161370&occ=first&dir=&cid=205625

 


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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