German Opposition at ECB Hardens as Lautenschlaeger RebufJeff Black
Germany’s board member at the European Central Bank said quantitative easing isn’t the right choice for the euro area at present, hardening a split among policy makers on how to respond to slowing inflation.
“A consideration of the costs and benefits, and the opportunities and risks, of a broad purchase program of government bonds does not give a positive outcome,” Sabine Lautenschlaeger, one of the ECB’s six-member Executive Board, said yesterday in Berlin. “There are very few shared competencies in fiscal policy. As long as this is the case, the ECB’s purchase of government securities is inevitably linked to a serious incentive problem.”
The comments suggest she and Bundesbank President Jens Weidmann are united against ECB President Mario Draghi’s push toward expanding stimulus to measures that might require purchases of sovereign bonds. Other known skeptics on his 24-member Governing Council include the Dutch and Austrian central bank governors. The officials meet this week to discuss the matter before a monetary policy decision on Dec. 4.
The ECB’s policy makers are divided on how to react to weakening price pressures and the threat that they might derail economic growth and become a self-fulfilling spiral of deflation as experienced by Japan. Euro-area inflation slowed to 0.3 percent this month, far below the ECB’s goal of just under 2 percent, exacerbated by plunging energy prices.
With ECB interest-rate cuts exhausted and purchases of covered bonds and asset-backed securities already under way, Draghi explicitly cited buying government bonds as a possible measure when he spoke to European lawmakers on Nov. 17. In her speech yesterday, Lautenschlaeger queried how such stimulus might work in practice.
“Long-term interest rates on Spanish and Italian government bonds, for example, are already lower than those from the U.S. or the U.K.,” Lautenschlaeger said. “It is therefore questionable whether we should ‘depress’ interest rates for the securities class even further.”
The yield is currently 1.9 percent on Spanish 10-year debt and 2.03 percent on Italian 10-year bonds, compared with 2.16 percent on the equivalent U.S. Treasuries and 1.93 percent on U.K. gilts.
Lautenschlaeger, 50, joined the ECB this year, becoming vice chair of its new bank supervisor as well as one of Draghi’s management team. The ECB Executive Board has a say on monetary policy through membership of the Governing Council, an arrangement with some equivalence in the U.S. with the Federal Reserve Board’s participation in the Federal Open Market Committee.
Her comments yesterday impinge on the customary “quiet period” in the week before monetary-policy meetings when officials refrain from speaking on possible measures. The remarks cap days of wrangling among policy makers over what comes next if inflation fails to respond before they meet this week in Frankfurt.
Draghi said on Nov. 21 that inflation has to be returned to target “as fast as possible,” and named government-bond purchases as a possibility. ECB Vice President Vitor Constancio argued on Nov. 26 that debt purchases could be conducted on the basis of the ECB’s capital key, roughly proportional to the size of each member state’s economy.
“Even if it is good to be prepared, one should beware of showing activism,” Lautenschlaeger said. “In any case, we’d have to wait three, four, five months” to be able to judge the impact of existing stimulus, she said.
Lautenschlaeger has previously already expressed skepticism over the ABS purchase program.
“Since monetary policy measures also have side effects, a central bank should use the mildest means to achieve the fewest possible side effects,” she said yesterday. “Unanimous monetary policy can and must maintain price stability. No more and no less.”