Tuesday

2nd Jun 2020

Opinion

Calling the eurozone’s bluff?

  • If QE fails, the ECB and the eurozone are empty-handed and Mario Draghi would no longer be the magician of all central bankers (Photo: Council of European Union)

Next week’s events have the clear potential to plant the seeds for another eurozone crisis. Not an immediate one with sharp market turmoil, but rather a creeping one: the sneaking and growing awareness that the eurozone is far from being perfect.

On 22 January, the European Central Bank (ECB) will plant the first seed. It will be very hard, if not impossible, not to announce the famous quantitative easing (QE) - government bond purchases.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Headline inflation turned negative for the first time since 2009, inflation expectations have dropped sharply and the economy is struggling to leave stagnation.

Moreover, the amount of official ECB statements hinting at QE have put the ECB into a corner from which it cannot escape without strongly disappointing financial markets. Whether QE is currently justified or not, hardly matters any more. It is all about central bank credibility and fulfilling market expectations.

The ECB simply has to deliver.

The impact of QE in the eurozone is highly controversial. If there is at least one single inflationary tendency in the eurozone right now, it is the amount of articles and opinions on the sense and nonsense of QE. Only time will tell which arguments were right or wrong.

Obviously, with almost all eurozone bond yields currently trading lower than US yields, a further rate reduction will not make a huge difference for the economy.

Unless QE manages to significantly lift inflation expectations.

Moreover, whether ECB purchases of government bonds will really free new lending space at banks or through higher equity prices room for corporate investment is far from certain. Therefore, the safest bet for a positive QE impact seems to be through a weaker euro exchange rate (though one could still hope for a positive confidence effect as well).

Given the track record of earlier acclaimed ECB rescue measures, chances are high that QE will join the boulevard of broken dreams.

Just remember that expiration dates of past bold ECB measures have become shorter and shorter. Whatever happened to negative deposit rates, conditional liquidity or even ABS and covered bond purchases? QE could meet the same fate.

If it does, the entire eurozone would have a problem.

The last magic trick

Up to now, QE has been the ECB’s and the eurozone’s last magic trick, no one dared to perform. If it fails, the ECB and the eurozone are empty-handed and Mario Draghi would no longer be the magician of all central bankers.

Instead, he would turn out to be a simple illusionist who could not solve the eurozone’s structural problems and has now run out of options.

The second seed for new chaos will be planted by the Greek elections. No matter what the results are, the Greek elections will have a significant impact on the eurozone. At least in the medium term.

The worst of all options is Grexit. Greece’s export sector is simply too small to reinvigorate an entire economy on the back of a new, devaluating, currency.

Instead, with a government default, a collapse of the banking sector and increasing poverty, the consequence of a Grexit would be disastrous.

Why should the rest of the eurozone care?

The European Stability Mechanism (ESB) and the ECB should be sufficient to avoid contagion similar to the one in 2012. However, they cannot prevent new, political, contagion. Successful or not, a Grexit would mark the end of the euro’s irreversibility as it would make an exit a viable future option for all other countries in any negotiation.

While a Grexit is clearly not the most likely option after the elections, renegotiations are.

Greece’s European partners will have to make some concessions, either after tough negotiations with Syriza or as a reward for the continuation of the Samaras-government.

In both cases, other eurozone countries may be prompted to ask for equal treatment. With upcoming elections in Spain and Portugal and struggling governments in Paris and Rome, the eurozone’s current crisis management will again be put to a severe test.

The relative calm on markets, first signs of economic improvement in crisis-battered countries and the strong belief in the ECB’s magic power to fix everything has clearly led to an unjustified abundance of enthusiasm last year.

And complacency.

As a result, the monetary union is still a provisional arrangement and actually more fragile than some might think. Public and private debt is still – at least in some parts – unsustainably high, structural reforms still lack ambition, the economy is flirting with deflation and stagnation and the power struggle between national and European levels goes on forever.

This is a clearly unsustainable construction, which at some point in time will either dissolve or move into more economic and political integration. For a long while, the ECB’s magical power has made politicians believe that this crossroad would never come.

Next week’s QE and the Greek elections could eventually call the eurozone’s bluff. It is time for the eurozone leaders to show their magic.

Carsten Brzeski is senior economist at ING Bank Germany

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Column

Hawks to doves? Germany's new generation of economists

For many Europeans, Angela Merkel's change looked sudden. But the groundwork started two years ago. Germany slowly ripened for the Merkel-Macron plan. This explains why it didn't meet massive public resistance in Germany.

Is Russia manipulating food supplies during pandemic?

Russia already dominates global oil – letting them dominate global food during a pandemic would spell disaster for the EU. It would effectively mean the EU, not just depending on Russian energy, but increasingly also on Russian food supply.

News in Brief

  1. Trump threatens to use army to crush unrest in US
  2. Trump wants Russia back in G7-type group
  3. Iran: Fears of second wave as corona numbers rise again
  4. WHO: Overuse of antibiotics to strengthen bacterial resistance
  5. Orban calls EU Commission recovery plan 'absurd'
  6. ABBA's Björn new president of authors' rights federation
  7. Malta and Libya to create anti-migrant 'units'
  8. France reopening bars and parks next week

Column

Hawks to doves? Germany's new generation of economists

For many Europeans, Angela Merkel's change looked sudden. But the groundwork started two years ago. Germany slowly ripened for the Merkel-Macron plan. This explains why it didn't meet massive public resistance in Germany.

Stakeholders' Highlights

  1. UNESDAHow reducing sugar and calories in soft drinks makes the healthier choice the easy choice
  2. Nordic Council of MinistersGreen energy to power Nordic start after Covid-19
  3. European Sustainable Energy WeekThis year’s EU Sustainable Energy Week (EUSEW) will be held digitally!
  4. Nordic Council of MinistersNordic states are fighting to protect gender equality during corona crisis
  5. UNESDACircularity works, let’s all give it a chance
  6. Nordic Council of MinistersNordic ministers call for post-corona synergies between economic recovery and green transition

Latest News

  1. Malta fiddles on migrants, as Libya burns
  2. Borrell: EU doesn't need to choose between US and China
  3. Post-Brexit and summer travel talks This WEEK
  4. State-level espionage on EU tagged as 'Very High Threat'
  5. Beethoven vs Virus: How his birthplace Bonn is coping
  6. EU's new migration pact must protect people on the move
  7. Spain takes 'giant step' on guaranteed minimum income
  8. Vestager hits back at Lufthansa bailout criticism

Join EUobserver

Support quality EU news

Join us