07 April 2013

Wolfgang Münchau: The ECB's priority should be to fix southern Europe

Last week, Mr Draghi said he was “thinking 360 degrees on the non-standard measures”. It looks as though he is up to something. What can he do? I could think of three options in rising order of firepower:

First, the ECB could find a way to provide direct incentives to banks to lend money. It might relax collateral requirements for various classes of asset-backed securities, or extend an existing programme to allow bank loans themselves to be posted as collateral. But do not hold your breath – this programme has not been very successful so far.

Second, he could backstop a massive lending programme to be spearheaded by the European Investment Bank to co-finance loans to small and medium-sized companies. For this to work, it would have to be big, uncharacteristically fast and unbureaucratic.

The third, and most radical, action the ECB could undertake is to purchase corporate bonds on the primary and secondary market, thus funding companies directly, in addition to purchases of covered bonds. A corporate bond purchasing programme may not help the smallest companies, though there is no reason in theory why they should not issue bonds for the ECB to buy. Some combination of the three measures may well do the trick.

Would this be legal? Of course it would. The ECB has a legal mandate to target price stability. It is not allowed to monetise government debt. But it is allowed to fix the transmission mechanism of its own policies. The obstacles are more political than legal. I have doubts whether the Bundesbank and other northern European central banks are willing to go along with this. They have argued in the past that it was the responsibility of Member States to fix their own banking systems.

So this is ultimately a conflict about banking union. A fully-fledged banking union would constitute a necessary and sufficient solution to the credit crunch problem. If you sever the link between Italian banks and the Italian state, then there should be no reason why Italian companies pay higher interest rates than their northern European equivalents.

To get anything done, Mr Draghi will once again have to organise a majority against the Bundesbank. This is possible, but he may find his political capital is finite. In that case, he should prioritise the unconventional over the conventional.

© Financial Times