16 September 2012

Wolfgang Münchau: QE would be right for Europe, too

When I heard the news of another round of quantitative easing in the US last week, my first thought was that Mario Draghi should have done the same. Instead, the president of the European Central Bank opted for a conditional bond purchasing programme with an uncertain start date. In the meantime, the eurozone’s faltering economy needs a much more determined monetary stimulus, and it needs it right now.

The main lesson I have drawn from the crisis resolution process is that you can never overestimate the complacency of European policy-makers. The notion that the OMT is in itself sufficient through some magical confidence effect reminds me of what happened after the ECB began its liquidity programme last year. That, too, was followed by a slowdown in political decision-making. I had expected the same to happen with the OMT eventually, but not quite so fast.

Let us now assume that I am wrong and that Mr Rajoy and Mr Monti both blink in the next couple of weeks and apply for the OMT, subject to some externally set conditionality. What will the ECB do when a newly elected Italian government takes office next year, and decides to tweak the reform process a little, as the Greeks have been doing recently? Will the ECB really sanction Italy, risking its economic collapse and possibly a financial meltdown in Europe? As the answers to this question are so obvious, there surely must be an incentive for electorates and their elected representatives to call Mr Draghi’s bluff, or at least to push him to the limit.

So we might be damned if the OMT works and damned if it does not. Mr Draghi was right in his core argument – that the ECB needs to repair the broken monetary transmission mechanisms. So why not do what the Americans did: start buying corporate bonds and other fixed-interest securities, including bank bonds, immediately. Instead of a complex programme of conditional government bond purchases, the ECB should be delivering a broad-based monetary stimulus. And while I do not believe another interest rate cut is going to make a big difference, there is no reason to delay it either.

The biggest danger for the eurozone right now is not a law court or an election but a rapidly deteriorating economy. Global demand is slowing, the euro is strengthening against the dollar, fiscal policy is pro-cyclical. A programme of quantitative easing would have been the best single measure – and possibly the only one – to halt a self-reinforcing crisis.

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