Nick Beams
The European Central Bank (ECB) committed itself to a quantitative
easing (QE) program of at least €1.1 trillion after announcing Thursday
that it would buy sovereign debt and other financial assets to the tune
of €60 billion a month to September 2016, and possibly beyond.
The
decision was announced by ECB President Mario Draghi after a series of
negotiations and manoeuvres in recent months aimed at circumventing
German opposition to the plan. Bowing to that opposition, Draghi
announced that the region’s 19 central banks would make 80 percent of
the purchases and be responsible for any risks.
The official
rationale for the decision is that the QE program is needed to combat
deflationary pressures in the euro zone—inflation turned negative last
month—and boost the region’s economy, which has still not reached the
levels of output attained in 2007.
But the measures will have
little or no impact on the real economy. Rather, they are aimed at
making available further supplies of ultra-cheap cash for financial
speculation, while governments across the region press ahead with
so-called “structural reforms” to worsen the social position of the
working class.
Draghi said the decision had been taken with the
aim of lifting inflation rates close to but below 2 percent. But with no
evidence QE will have any such impact, the statement amounted to a
commitment to open-ended monetary expansion.
The markets
celebrated because both the extended time frame and the monthly volume
of bond purchases exceeded expectations. Economists had predicted the
monthly injection would be €50 billion.
European stocks continued
their rise of the last few days, reaching new seven-year highs. In the
US, all three major stock indexes rose substantially, with the Dow Jones
Industrial Average shooting up 259 points.
The value of the euro fell further, fueling hopes on the continent that the plunging European currency will boost exports.
The
mood of the financial speculators, who will benefit to the tune of
tens, if not hundreds of billions of dollars as a result of the
decision, was summed up by Laurence Fink, the chief executive officer of
the massive hedge fund BlackRock. Speaking at the World Economic Forum,
the annual gathering of the world’s billionaires in Davos, Switzerland,
where this year’s theme is inequality, he said: “We’ve seen over the
last few years you have to trust in Mario. The market should never, as
we have seen now, the market should not doubt Mario.”
The decision
to begin the QE program was not unanimous. German Bundesbank President
Jens Weidmann and Germany’s representative on the ECB’s executive board,
Sabine Lautenschläger, voiced their opposition to the move, with
Austrian, Dutch and Estonian central bank governors also reportedly
expressing reservations.
Weidmann has called QE “sweet poison,” as
it lets European governments off the hook when it comes to carrying out
debt-reduction programs.
Draghi said the bank’s governing council
had taken these issues “into account, and that’s why this decision will
mitigate those concerns.” The chief concession to Germany and other
critics is that 80 percent of purchases will be carried out by national
central banks, which will bear the risks.
The depth of opposition was indicated in a Financial Times
report which said that, while paying lip service to ECB independence,
“German officials were privately seething… that the bank had decided to
embark on QE.”
The effect of ECB’s concession is to increase
national divisions over policy and undermine the principle that the ECB
acts in the interests of the euro zone as a whole. In the longer term,
it adds to concerns that the entire project of monetary union is
inherently unviable and the euro currency itself may collapse.
The Financial Times
cited one unnamed euro zone finance minister who said “the problem with
purchases by national banks is that it sends a signal that the euro
zone is not moving in the direction of greater mutualisation of debt,
something that will be necessary in the longer term for a successful
single currency.”
Earlier this month, as it was becoming apparent
that concessions would be made to the German position, the governor of
the Bank of Italy, Ignazio Visco, opposed the abandonment of
risk-sharing. “We would be well advised to maintain the procedures that
[are used] in all our monetary policy interventions: risk should be
shared across the euro system as a whole,” he said.
While making
concessions to Germany, Draghi also attempted to assuage concerns that
national divisions were being introduced. He said the governing council
would retain control “over all the design features of the program and
the ECB will coordinate the purchase, thereby safeguarding the
singleness of the Eurosystem’s monetary policy.” However, his remarks
could not cover over the divisions that exist and are becoming more
open.
Speaking at the Davos meeting, German Chancellor Angela
Merkel avoided any direct criticism of Draghi and the ECB, claiming
Germany had a tradition of supporting independent central bank
decisions. But she made clear that the austerity drive, which her
government has promoted across the euro zone, should be deepened.
Responding to critics that Germany was promoting austerity for its own
sake, rather than growth, Merkel said healthy finances were necessary
and debt had to be kept down.
According to a Financial Times
report, Merkel’s message, conveyed both in her speech and in her
responses to questions that followed, was that with additional monetary
loosening, governments might be tempted to “buy time and avoid doing
structural reforms.” Merkel said she was not surprised that the ECB
decision was regarded as controversial because it allowed uncompetitive
companies to survive, at least in the short term.
The national
divisions and conflicts reflected in the structure of the European QE
program are not confined to that region, but are expressed more broadly.
One of the consequences of the decision will be to further depress the
value of the euro, already at an 11-year low, sending it closer to
parity with the US dollar and consequently worsening the American trade
position.
In the past week, central banks in Denmark, Turkey,
India, Peru and Canada have announced cuts in interest rates, which will
lower the value of their currencies.
The Canadian central bank,
which made a surprise decision to cut its rate on overnight loans by
0.25 percentage points on Wednesday—the first such reduction in almost
five years—said the sharp fall in oil prices had increased downside
risks on inflation and financial stability. An interest rate cut was
needed to return the economy to full output, it said.
Since
Australia, like Canada, is a commodity-exporting country, the Canadian
decision has increased pressure on the Australian central bank to reduce
rates.
Together with the QE programs in Europe and Japan, the
effect of these measures is to lower the value of the various currencies
and apply upward pressure on the US dollar. In effect, this week’s
decision represents an escalating currency war in which each of the
participants tries to offload the effects of deflation onto its rivals.
Yesterday’s
European QE decision will not bring economic recovery. Instead, it will
intensify the deepening global conflict between rival economies.
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