15 January 2015

European Voice: Central bankers split over merits of ECB bond-buying

The European Central Bank appears to be closing in on radical new measures to boost inflation and growth in the eurozone, with the bank’s president, Mario Draghi, pressing central bankers to adopt a common position ahead of a crucial meeting in Frankfurt next Thursday (22 January).

The prospect of an ECB programme of quantitative easing (QE) has raised some bitter opposition, in particular in Germany. But the stance of Draghi – who is broadly in favour of QE – has gained momentum after indications published last week that consumer prices in the eurozone have started to fall, a trend that could signal a long bout of economic stagnation.

The discord among eurozone central bankers has been evident in an unprecedented wave of media interviews in recent days. Austrian central banker Ewald Nowotny, Italian central bank governor Ignazio Visco, and ECB executive board member Benoît Coeuré of France have all suggested they would be open to QE as a means of bolstering inflation. Christian Noyer, France’s central banker, told German newspaper Handelsblatt on Tuesday (13 January) that opposition to QE was falling. But he said the debate continued to be “complex”, and insisted that no decision had yet been taken.

From the other end of the spectrum, Sabine Lautenschläger, Germany’s ECB executive board member, told Der Spiegel magazine on 7 January that she was “not convinced” of the need for QE. It should be launched, she argued, only in the face of “exceptional risks” to the economy. Germany’s central bank chief, Jens Weidmann, a longstanding and staunch opponent of QE, is thought to be unmoved. The Netherlands’s central banker Klaas Knot has previously expressed strong scepticism.

The central banks of the United States, the United Kingdom and Japan have launched extensive QE programmes, in which the central bank prints money to buy up bonds, pushing up asset prices and injecting money into the economy. But such a policy at European level is opposed as unconventional and untested by monetary conservatives.

They argue that, in the absence of a eurozone bond, the ECB would be obliged to purchase the bonds of national governments, contravening its mandate. Supporters of QE counter with the argument that the ECB’s mandate requires it to maintain inflation “close to, but below, 2%”.

An additional concern among opponents of QE is that by boosting growth it could relieve pressure on national governments to undertake structural reforms, and promote short-term fixes to problems that need long-term solutions. Some central bankers appear uncomfortable with any decision to buy government bonds just before a general election in Greece (25 January) that may bring an anti-austerity party, Syriza, to power.

Draghi has in recent weeks recalled that the ECB governing council does not need unanimity to take decisions – opening up the possibility of opponents being outvoted. But a vote on such a major issue of monetary policy would generate turbulence within the ECB, with Coueré describing it as “possible and permissible, but not advisable”. Planning for QE is “well advanced”, according to Coueré.

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