The European Central Bank (ECB) has implemented a number of measures to boost economic recovery in the Eurozone since the eruption of the global financial crisis in 2007-9. Some interventions have been aimed at easing the provision of credit from the banking system to the real economy: the cuts in the interest rate on the main refinancing operations and the Long-Term Refinancing Operations (LTROs) fall under this category. However, other, more politically contentious actions have been implemented to exert a more direct influence on growth and inflation: the latter of these is the so-called quantitative easing (QE). The term QE indicates vast financial asset-buying programmes aimed at pumping liquidity into the economy.
The first thing that should be clarified is that QE programmes may involve a variety of assets, ranging from government bonds to mortgage-backed securities and debt from private institutions. QE interventions were conducted very early after the outset of the crisis by the US Federal Reserve, as well as by the Bank of England. Conversely, in the case of the ECB, the purchase of asset-backed securities (ABS) started only later. A first fundamental step on this path was the launch of the Outright Monetary Transactions (OMT) programme, announced in the summer of 2012. This programme was launched at the height of the Eurozone’s debt crisis and, despite never having been used, is widely credited with bringing the currency area back from the brink of collapse.
The ECB’s bond purchase programe started in October 2014 and was initially focused on private sector bonds. Only later, in January 2015, was an actual QE intervention announced, with the existing programme being extended to the purchase of euro area government bonds in the secondary market. The logic behind the implementation of QE in Europe was different from the American and British case: while the timely action by the Fed and the Bank of England was intended to countervail the harmful effects of the financial crisis on economic growth, the ECB decided to activate QE mainly to avert deflation, consistently with Article 127 (1) of the Treaty on the Functioning of the European Union, which sets price stability as ECB’s primary objective.
After the announcement of 22 January 2015, in March 2015 the ECB started buying around €60 billion of public and private bonds each month. This policy was initially expected to continue until September 2016, thus generating more than €1 trillion by the end of the programme. However, since economic growth and inflation in the euro area remained rather sluggish in subsequent months, the ECB decided to make use of additional tools. In particular, in March 2016 ECB president Mario Draghi announced the implementation of what the press dubbed “bazooka”: the monthly amount of bonds purchased was raised to €80 billion (including bonds issued by non-bank corporations), while the benchmark interest rate was cut to historic-low levels.
POLITICAL FAULT LINES
The conflict over QE so far has involved a wide array of actors, at both the national and supranational level. As for the intergovernmental rifts, while some head of state and government favour attempts by the ECB to behave like a traditional national central bank—it is the case, for instance, of French president François Hollande, who has often argued in favour of doing more to boost growth and fight a “real deflationary risk” in Europe—others have taken a more nuanced stance on the ECB’s unconventional monetary policies. Angela Merkel, for example, has mostly refrained from criticizing QE. German Finance Minister Wolfgang Schäuble, however, has had a less conciliatory position, overtly criticizing Draghi for the ECB’s liquidity injections. Other German politicians, such as conservative MEP Markus Ferber, have expressed even greater disapproval, accusing the ECB of going “beyond its mandate”. Yet, overall these concerns have never turned into open political conflict, mainly due to the high degree of political independence that the ECB enjoys in its policy-making process.
The same is not true for national central bankers, who are directly involved in the ECB’s decision-making process together with the Bank’s executive board members. Needless to say, the main player here is ECB President Mario Draghi, who started making the case for QE well before its implementation and whose stance gained momentum as economic growth and inflation stagnated. The starkest opposition has traditionally come from the Bundesbank and its Presidents: currently Jens Weidmann, who was the only one to formally oppose the OMT programme in 2012. Weidmann also was a longstanding and staunch opponent of QE in 2015. Scepticism was also expressed by German ECB executive board member Sabine Lautenschläger who claimed not be convinced of the need for QE. It should be launched, she argued, only in the face of “exceptional risks” to the economy. However, the though position of the Bundesbank seems to have softened over time, as it has increasingly opened to the purchase of public and private assets meeting certain quality standards starting from 2014. Conversely, nearly all other central bankers suggested from the beginning that they would be open to QE. In particular, Austrian central banker Ewald Nowotny, Italian central bank governor Ignazio Visco, and French executive board member Benoît Coeuré made this very clear. Only the Netherlands’s central banker, Klaas Knot, seemed to be closer to the German stance.
Another important actor in these matters are the courts. In June 2015 the European Court of Justice threw out a German legal challenge to the bank’s Outright Monetary Transactions (OMT) programme, establishing that “the programme for the purchase of government bonds on the secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of member state”. The legal challenge was launched by a wide group eurosceptic German lawmakers and academics led by Peter Gauweiler, a Bavarian politician, after ECB President Mario Draghi’s pledged to do “whatever it takes” to save the euro at the end of summer 2012. In June 2016, the German Constitutional Court tooruled in favour of the OMT programme, establishing that it did not violate German federal law. This marked the end of the legal threat against QE in Europe.
In the past few weeks the European Central Bank’s governing council has left interest rates on hold, and reaffirmed plans to continue the €80 billion QE programme until at least March 2017. In an October 2016 press conference, Mario Draghi clarified that “an abrupt end” to quantitative easing is “unlikely”. In the meantime, inflation reached its highest level in almost two years in September, at 0.4%, but remains far off the ECB’s objective of just below 2%. That is why many observers expect Draghi announce further policy changes aimed at bringing inflation closer to the ECB’s mandated target in the upcoming weeks and months.
However, the debate has also started touching on the topic of an “exit strategy” from QE. Investors were spooked by a Bloomberg report in early October suggesting that the ECB was considering “tapering”—or gradually phasing out—its QE scheme. While the ECB strongly denied the report, this news pushed up bond yields and served as a reminder of how fragile the path toward restoring confidence in the Eurocrisis bond markets remains. All in all, it seems reasonable to think that the decision of whether phasing out QE or keeping it alive in the upcoming months will be extremely dependent upon the political developments of the continent, ranging from the results of the upcoming Italian constitutional referendum and Austrian presidential election to the French presidential election in April 2017.
Photo Credits CC Kiefer
Also published on Medium.