European Central Bank’s Mario Draghi Learns the Limits of ‘Whatever It Takes’
Posted by hkarner - 12. Dezember 2016
Source: The Wall Street Journal By SIMON NIXON
Political opposition to what the ECB has been doing has become too vocal to ignore, Simon Nixon writes
When the history of the eurozone is written, the events of last week may come to be seen as pivotal.
European Central Bank President Mario Draghi insists the package of measures he announced Thursday didn’t amount to a tapering of the ECB’s quantitative-easing program—at least not in the strict sense of starting a process of reducing bond purchases to zero. Indeed, the ECB could even be said to have loosened monetary policy further: By opting to buy €60 billion ($63.4 billion) of government bonds a month for nine more months rather than €80 billion for six months, the ECB has committed to injecting €60 billion more cash into the eurozone economy than the market had been expecting. The ECB’s decision to start buying government bonds with a maturity of just one year and to buy bonds yielding below its own deposit rate has also led to a steepening of yield curves, delivering a boost to bank margins that should feed through to credit supply.
Even so, what emerged last week was the result of a hard-fought compromise that has exposed the unresolved tensions and challenges that continue to underlie eurozone policy-making. The decision to reduce the scale of monthly bond purchases was a concession extracted by central bank governors in Northern Europe as the price of allowing Mr. Draghi to extend QE until the end of 2017, maintaining an ECB fire blanket over government-bond markets throughout a risk-filled political year with elections looming in the Netherlands, France, Germany and maybe Italy, too.
Similarly, the modest tweaks that the ECB agreed on to the self-imposed limits of its QE program fell far short of what many in the markets had been expecting: bolder overhauls that had been under discussion for months, including allowing the ECB to buy more than 33% of individual bond issues or to change the way it allocated purchases among countries were dropped.
For the first time since his 2012 promise, Mr. Draghi is discovering that his vow to do “whatever it takes” to save the euro is subject to political constraints. His original pledge was so effective because the markets recognized that not only was Mr. Draghi willing to go to the outer limits of the ECB’s mandate to ensure monetary and financial stability but that, unlike his predecessor, he was prepared to rely on political acquiescence after the event, rather than seek it out before. The result has been an ECB that has acted boldly and decisively, even if not always as quickly as markets hoped.
Yet now, with inflation still only 0.6%, far below the ECB’s target of “close to but below 2%” and forecast to remain below target at 1.7% in 2019, and with Portuguese and Italian bonds in particular yielding well above the ECB’s base rate and comparable German bond yields, a question mark now hangs over the ECB’s ability to take decisive action in the future.
In reality, political opposition to what the ECB has been doing has become too vocal to ignore—and not only in Germany, where frustration at the impact of ultralow interests rates on savers has risen up the political agenda. In the Netherlands, for example, retirement incomes have had to be cut in response to pressures on pension-fund returns. House prices in Amsterdam, meanwhile, are up close to 25% this year, raising fears that loose monetary policy is fueling financial bubbles.
ECB analysis showing that ultralow rates have in fact benefited retirees through higher asset prices and that all eurozone countries benefit from financial stability and increased economic health have failed to convince many policy makers and politicians. Instead, they fear that QE is shielding governments from market pressures, allowing them to duck tough decisions needed to put individual government finances and the euro area as a whole on a stable footing.
As a result, the eurozone finds itself back where it was before Mr. Draghi arrived, with responsibility for resolving the eurozone’s deep structural problems handed back to politicians. That doesn’t necessarily mean that a fresh eurozone crisis is imminent or inevitable: Mr. Draghi will be hoping that the ECB’s commitment to keep buying government bonds until at least the end of 2017—with an implicit commitment to continue beyond then given current inflation projections—will keep markets calm until at least after the German elections in September.
This should buy politicians some time to address market concerns about the long-term sustainability of national debt burdens, whether by taking steps to improve long-term productivity and growth potential or by taking action to improve the resilience of the euro-area financial system. That could be achieved, for instance, by introducing a system of common-deposit insurance for the banking system, which would pave the way for greater cross-border risk-sharing.
But Mr. Draghi has already bought the eurozone four years to make these changes and has little for show for it. With the ECB now signaling that there is a limit to how much more time it can buy, markets may want to know whether Europe’s political leaders are now ready to do whatever it takes. They may not be willing to wait a year for an answer.