On the consequences of Mr Draghi’s impending QE announcement – in THE ECONOMIST

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MARIO DRAGHI will, on Thursday, make a momentous announcement against the backdrop of the euro zone’s continued fragmentation. It is therefore imperative that the European Central Bank’s asset-purchase programme, or quantitative easing, be structured in a manner that prevents further fragmentation and gives rise to greater euro-zone solidity and consolidation.

The idea of asset purchases by national central banks, rather than by the ECB itself, may be politically convenient but comes at the considerable cost of deepening the perception that the euro zone is refusing to come together, not even in the context of monetary policy. Such a fragmented form of quantitative easing will be perceived in markets as the end of a common monetary policy. The last thing Europe needs is the perception that we have a common currency but no common monetary policy.

Regarding the asset-purchase programme’s philosophy, we very much doubt that, at this juncture, purchasing government bonds in proportion to each member-state’s equity in our central bank is either necessary or desirable. If the programme allocates, say, €500 billion to sovereign-bond purchases, this would translate into a paltry €40 billion allocated to Spanish debt—a sum that will have no appreciable effect on Spain’s deflationary spiral while potentially boosting the interest-rate differential between German bunds and peripheral bonds.

Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall. Of course, one understands that the ECB faces political and legal constraints that prevent it from pursuing a sovereign-bond-purchase programme that would work well in practice. For this reason a different type of asset-purchase programme would be preferable, one that bypasses the legal and political constraints that the ECB is currently facing and one that is potentially far more effective in tackling deflation and the chronic underinvestment that has caused it.

Turning briefly to the reported reluctance of the ECB to include Greek government bonds in the asset-purchase programme, if Greek government bonds are treated differently, let alone excluded, not only will the euro zone’s solidity be questioned; additionally, such a move will be perceived as an indirect intervention by the ECB in the electoral process with destabilising effects on Greece’s economy. More broadly, announcing that the asset-purchase programme will treat some member-state bonds differently from others is yet another signal that Europe is uncertain about the euro zone’s solidity. It would be a serious error to emit such a signal to the markets and to Europe’s citizens at a time when the euro zone’s consolidation ought to be a first priority.

To avoid all of the above pitfalls and maximize the asset-purchase programme’s impact, I have already proposed a different approach: that the European Central Bank should purchase a single asset in the secondary markets: European Investment Bank bonds. To make this programme macroeconomically significant, the European Investment Bank should at the same time embark upon a large-scale, pan-euro-zone investment-led recovery programme, safe in the knowledge that the ECB is standing by to keep EIB-bond yields ultra-low. Such a partnership between Europe’s two significant institutions, the ECB and the EIB, would:

  • promote monetary stability and an investment-led recovery
  • overcome the ECB’s legal difficulties regarding member-state debt-financing (since no sovereign debt would be involved)
  • avoid inflating asset prices (as the ECB’s intervention would be channeled directly into investments in the real economy, rather than inflating paper values)
  • signal to markets and citizens Europe’s determination to defeat deflation, bolster investment without new government debt, and crowd in private investment

Summing up, the ECB’s efforts to regain control of monetary policy and to defeat deflationary expectations are to be commended. However, the ECB’s governing council should attempt to come up with an asset-purchase programme that is both effective and an enemy of the euro zone’s ongoing fragmentation. Doing something is not always better than doing nothing, especially when there are alternatives better than either.



  • The problem with this very good idea, is that the EIB takes so long to evaluate projects, requires so much bureaucracy, that the QE problem, designed to quickly pump liquidity into the system (and not to specifically join the southern zone debt program), would simply not work.

  • “Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall.”

    That’s a real good one: nations which, irresponsibly, lived beyond their means and heaped up debt and/or didn’t bring their structural deficiencys in order, would be rewarded.

    • So, what would be your sugestion?
      Help those that do not need help, and punish those that are in trouble?
      What outcome would such policy produce, over short term and over medium term?
      How would that affect those that are thinking of leaving EZ because it represent more trouble then benefit? How would even more inequality affect present comabustible situation in EZ where everyone already blames other?

    • What’s “a real good one” is that you oppose something that is a given for virtually every country with its own currency outside the EZ: Using its respective CB as a buyer of last resort for its Treasuries.

      And that’s not even taxpayer’s money we’re talking about…but no…you’d rather see the periphery keep on suffering for no real reason other than economic idiocy/iliteracy.

    • One quick note Sam, the entire population of the nation did not live “beyond its means.” Instead very few saw actual gain from all that debt. People like crooked businessmen, politicians, crooked judges, and their immediate trickle downs—that’s about it.,Let’s call them our greek one percenters (or stretch that to 8%). The rest of the people have no money, no prospects, no hopes, and a dying identity. Our only slim hope lies in SYRIZA, and what can the level headed people actually expect from them except sympathy for now.
      What we should be getting excited about is that this is the start. The start of what? Only God knows. Maybe it’ll be the start of our last march towards Fascism, which is what runs this racket, swimming in its rotten math, accompanied by its idiotic social constructs such as equating wealth with superiority. ( which just means the biggest thief or liar is the winner)
      Or maybe, just maybe it’ll be the start of new European Coalition, where we all give the global loan sharks a collective middle finger and start anew again.
      That’s what I hope for, but maybe I’m an optimist

    • In reality, Germany capitalists cheated when they enacted the Hartz laws. Labor compensation in the EU was supposed to be tied to productivity, and Germany reneged on that.

    • A myopic perspective and pointless comment. If you really believe the citizens of these ‘irresponsible countries’ are to blame for this crisis and that these policies are designed to reward them, then I have some nice AAA paper in the Caymens to sell you. Be quick though, I’ve got a very interested buyer in Frankfurt.

    • @ Jordan

      “So, what would be your sugestion?”

      The same that I preach since 2008:

      1) no more bailouts for nobody (as we all know, the mountains of taxpaer’s money didn’t do anything for the nations but are keeping zombie banks in Greece, France, Germany, UK and elswhere alive)
      2) grant Greece a real big haircut, if, and only if she leaves the eurozone
      3) if she doesn’t leave, go to 1) above

    • “Labor compensation in the EU was supposed to be tied to productivity”
      I agree it makes sense to tie them together. BUT we still have “freedom of contract” and no central EU agency planning salaries.

    • There is no capitalism anywhere in the EU. The EU supports corporatism, which is good for very few and bad for 99%

    • By that logic, all largest western banks should have been bankrupted after the 2008 financial crisis, instead of being bailed out

  • Ελπίζω να την ακούσουν την ανάλυση αυτή ! Καλή δύναμη και με τη νίκη !

  • Ο Draghi δεν τα έκανε θάλασσα / he didn’t mess up! We have to examine the details to know how good the policy is but it’s obviously not terrible. There’s a large QE package, some sovereign risk sharing, and an opening to buy “agency bonds” which would be consistent with your proposal with pooled risk. The program applies to Greece like any other country.

    As for the risk that’s held by each national central bank, it may be a moot point. NCBs are free to roll over debts presumably ad-infinitum and hand the interest back to the national treasury. If the NCBs have to recognise losses in the event of a default, they may be implicitly insured by the ECB and if not that’s no worse than the situation before QE.

    We’re awaiting your assessment, but my first impression is that the ECB announcement was as good as might be realistically hoped for. It opens the door for risk pooling, monetary reflation to end the crisis, and does not interfere with the Greek elections.

  • Yanis: I think the same way on these issues. Look forward to SYRIZA goverment and your taking these matters directly to Brussels, Germany and Mr. Schauble. It is time for a serious open debate. The ND/PASOK approach of Oliver Twist was disasterous. If the EU/ECB cannot put their act together, then there is no reason to continue the currency union. Membership becomes an iron cage.
    EU rule by ultimatum has become an insufferable tyranny that must end now!

  • Nice article.

    If QE is to be conducted via national CB’s then it makes no sense for the asset purchase program to be conducted proportional to each country’s capital contribution to the ECB.
    After all every country has 100% capital contribution to its domestic CB which is the entity that will run the scheme.

  • The EU created a fiscal environment in which corrupt or inept governments were able to borrow well beyond their means. Several countries are now in default or near default positions. Those countries cannot recover while in the EU under the current regime. Either something changes or they must exit the EU and the Euro. Disastrous for both them and the rest of the EU.
    Blaming the people for the actions of the governments, acting in a fiscal framework in which corruption was allowed to continue for years, is hardly going to solve anything.
    If the Euro and the EU are to continue, something along the lines proposed by VAROUFAKIS is essential, along with changes to the fiscal union which make future failures of this type impossible.

  • What are your target numbers for the EIB ? The EIB website says Greece has gotten 7 billion since 2010.

  • Despite Mr. Draghi whipping out his minuscule QE bazooka, what’s a trillion for God’s sake between more than 20 Eurozone member countries, the fact is this does nothing to redress the large structural imbalances between the more northerly members and their southern counterparts – essentially its more kicking the can down the road and waiting for the confidence fairy. The fact is that the EU Stability and Growth Pact requires urgent reform that allows for huge fiscal expansion within the EZ member nations and the EU as a whole – to hell with austerity and neoclassical economic prescriptions that are ripping the heart and soul out of our continent.

    Step one in this process is for the Greek people to elect a government with their interests in mind, and not those of the criminal financial elite and multinational corporations. It really is time to turn the clock back if we all wish to move forward, for that fact alone we must implore the Greek electorate to vote for a reformist left of centre Party not captured by elites and wanton lust for personal financial gain – corruption in other words. As such, one looks forward to a Syriza election victory on Sunday, which many can look upon as the beginning of the end of then lunacy that has infected Europe since the days of Margaret Thatcher.

    The world’s gaze is upon you, so lets use the opportunity to begin radically altering Europe and its economic and political structures, hence one’s desire for a truly left-of-centre Greek government – I wish all Syriza’s Parliamentary candidates God’s speed and look forward to positive democratic developments beginning with a Syriza victory.

  • I’m not quite sure how the EIB bonds would recoup their investment – would they recoup their investments through repayments by European governments for the projects they realized in them? How would the European governments pay back this money without again going into large debts?

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