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.