Monday

19th Nov 2018

Opinion

The ECB: An act of determination or desperation?

  • It’s an old economic controversy: does supply drive demand or is it the other way around? (Photo: Valentina Pop)

In yet another attempt to revive the eurozone recovery and fight low inflation, the European Central Bank (ECB) on Thursday (4 September) emptied its toolbox almost entirely.

With another rate cut, an ABS (asset-backed security) purchasing programme and a new covered-bond purchasing programme, the ECB has now reached a point at which fully-fledged quantitative easing - outright purchases of government bonds, is the only option left.

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  • Carsten Brzeski is Senior Economist at ING Bank (Photo: ING-DiBa)

Now that the ECB has almost entirely emptied its arsenal, the pressing question is: Will it help?

A rate cut by 10 basis points, from almost zero to even closer to zero, will clearly not make a difference for the eurozone economy.

It seemed as if ECB president Mario Draghi wanted to tell banks to go out and subscribe massively to the forthcoming liquidity operations.

But it is doubtful that 10 basis points will really tip the balance for a bank to join the liquidity crowd

As to the new programme to purchase asset-backed securities, this is something the ECB has been talking about for almost a year.

Who should take the risk for any asset purchasing programme was the hot potato in European policymaker circles. It was meant to be anyone but the ECB.

Kick-starter for eurozone?

The ECB's actions show the extent of its concern. It is worried that geopolitical risks and the (under-estimated) structural weaknesses of some bigger eurozone economies have slowed down the already sluggish recovery.

Headline inflation is at a cyclical low and inflation expectations have dropped significantly, at least according to some market-based measures.

The rate cut will not make a difference and given the repayments of earlier ECB liquidity to banks, it is very hard to tell whether the upcoming long-term liquidity provisions (TLTROs) will really be a success.

Asset-backed securities are not always in the hands of banks. Therefore the new purchasing programme will not automatically lead to a deepening of the market. Whether such a programme actually really leads to more credit to the private sector depends also largely on the appetite for new loans.

It’s an old economic controversy: does supply drive demand or vice versa?

Super Mario

All of this means that the success of Thursday’s announcements is far from certain. Even Draghi admitted that monetary policy alone cannot do the job.

Fiscal policies and structural reforms are another major requirement to achieve a sustainable recovery of the Eurozone.

In this context, Draghi back-peddled somewhat from his recent Jackson Hole speech, or at least tried to adjust the interpretations of the speech, by stressing the need for structural reforms and the overarching role of the eurozone’s fiscal rules.

If anyone believed that the ECB had given its blessing for a round of deficit-spending, Draghi proved them wrong.

Since his 'whatever-it-takes' speech two years ago, ECB president has been the master of financial markets. There is an almost unbeatable belief in Draghi’s power and determination not only to save the eurozone (back in 2012) but also to bring it to a sustainable recovery (now in 2014).

Thursday's announcements should have further strengthened this belief.

Even if the long-term effect from the latest measures is far from certain, the short-term effect should be a weaker euro exchange rate, bringing some relief to eurozone exporters.

Draghi will now need support from national governments in the form of stepped up reforms if he does not want to lose his superhero status.

The writer is a senior economist at ING Bank

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