17th Jul 2019


Failure to launch: Is the ECB's tool-kit empty?

  • After last week's offer of cheap loans failed to entice banks, has the ECB reached the limit of its capacity? (Photo: Valentina Pop)

During the EU's seven year economic slump, the European Central Bank (ECB) has, to most observers, stood alone among the EU institutions in having had 'a good crisis'.

As analysts and policy makers again become concerned that the eurozone's already fragile recovery is faltering, they don't look to the European Commission or government ministers but to 'Super Mario' Draghi as the saviour.

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Draghi's appearance before MEPs at his quarterly monetary dialogue on Monday (22 September) was always likely to be less comfortable than usual.

Last Thursday, the ECB launched its Targeted Longer-Term Refinancing Operations (TLTRO) programme, which offers cheap four year loans to banks in the hope that they will, in turn, increase their lending to small businesses. If they do not increase their lending, banks must repay the ECB inside two years.

The programme is the first part of a plan to increase the ECB's balance sheet of liabilities by around €1 trillion from €2 trillion to €3 trillion, taking it closer to the level it was at in 2011 and 2012 at the heart of the eurozone crisis.

However, at the end of the day, the Frankfurt-based bank announced that 255 eurozone lenders had borrowed just €82.6 billion from a facility worth up to €400 billion. The ECB will hold its second auction in December, with just under €318 billion of the original pot still on offer to banks.

Is the ECB losing its Midas touch and should we be worried?

There is no question that the Frankfurt-based bank would have been disappointed last week. Take-up from banks was more muted than most analysts expected - most economists were forecasting that between €110 billion - €130 billion would be tapped.

Moreover, the TLTRO scheme may be just one tool in the ECB's monetary policy arsenal aimed at stimulating the eurozone economy, but the truth is that the ECB is almost at the limit of what it can do.

Earlier this month, the bank's governing council cut its main interest rate to 0.05 percent and unveiled a private sector bond-buying programme that went only just short of US-style quantitative easing (QE). A QE programme of government bond-buying is pretty much the only weapon it has left.

But in another sense, the apparent failure to launch could take some of the pressure off the bank.

Monetary policy isn't an exact science, and easing credit conditions is not the only way to rouse a slumbering economy. Whether a cheap loan programme actually translates into more credit to the private sector depends on the appetite for new loans.

It’s an old argument in economics: does supply drive demand or vice versa?

Carsten Brzeski, chief economist for ING, tells EUobserver that the low take-up "did not come as a surprise", explaining that many banks are waiting until the ECB reveals more details about its plans to buy private sector bonds and securities. They are also waiting for the ECB to publish its 'stress tests' of lenders across the bloc.

Not only that, but most banks are not desperate for cash. "As banks knew that they can still get liquidity against exactly the same conditions in December, the costs of waiting are relatively low", comments Brzeski.

Although Brzeski concedes that although the ECB will "struggle" to meet its goal of lending out an extra €1 trillion, it will "not be highly alarmed.

"The jury is still out and it will take at least until December if not longer to assess whether the ECB’s attempts to increase credit supply to the real economy succeeded or not," he says.

Perhaps the relative failure of the first TLTRO auction is a reminder that people need to be more realistic in their expectations of the ECB. Draghi has continued to stress that politicians need to do their bit as well, for instance at his August speech at a conference at Jackson Hole in the US, stating that lower taxes and structural reforms are needed as well as monetary policy.

On this question, EU ministers are still divided. The weekend's G20 meeting of finance ministers in Australia saw a replay of the debate between 'doves' such as the US's Jack Lew calling for renewed stimulus measures and 'hawks' like Wolfgang Schaueble insisting that governments must prioritise cuts to their budget deficits.

It is the resolution of this question - and the balance between deficit reduction and growth-driving investment - that will ultimately determine how quickly the employment and economic growth pick up.

The TLTRO launch should serve as a reminder that confidence will not magically return just because the ECB turns on the taps.

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