ECB’s Weidmann Rejects Sovereign QE With No Deflation Seen

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Jens Weidmann said there’s no need for the European Central Bank to expand monetary stimulus, and argued that sovereign-debt purchases are problematic even if slumping oil prices cause deflation.

“Such a development initially requires no monetary policy response, as long as no second round effects are to be seen,” the Bundesbank president said at an event late Monday in Frankfurt. “There’s a whole row of economic reasons that speak against government-bond purchases, even before you consider the legal question of whether they’re compatible with the ban on monetary financing.”

The acceleration of this year’s oil-price slump has sharpened the debate in the ECB over further policy measures to fend off deflation, with President Mario Draghi priming investors for more asset purchases as soon as next quarter. Weidmann, and up to five other Governing Council members, are against pre-announcing government-bond buying before the effects of existing programs can be judged.

“We have already acted, pre-emptively, in the expectation of a worsening of the economic situation,” Weidmann said. “But this plays only a minor role in the discussion. Instead, it’s only ever asked, ‘what is coming next?’ And then mostly the question, ‘when will you finally buy government bonds?’ That raises the expectations for this measure to such a level that they can only be disappointed.”

No Miracles

As the 18-nation euro-area economy has stagnated this year, an oil price that has fallen by about 44 percent since January has helped drive inflation close to zero.

“An inflation rate that for a few months lies below zero, for me, doesn’t represent deflation,” Weidmann said. “That only comes when an expectations-driven, self-reinforcing downward spiral of negative inflation rates, GDP declines and wage decreases follows.”

Still, as the ECB interprets its mandate as keeping inflation close to but below 2 percent, it started buying asset-backed securities and covered bonds this year, as well as launching a program of long-term bank loans in a bid to spur credit and demand. Even if those measures prove insufficient, there’s not much evidence that buying sovereign debt would work as it has in the U.S., the U.K. and Japan, Weidmann said.

“Simulations show that quantitative easing in the euro area would be able to lift the inflation rate, but one should not expect miracles,” he said. “Significant volumes would have to be deployed, even to achieve a modest and uncertain effect.”

Instead, buying sovereign debt would only lift pressure from governments to rein in budgets and to make their economies more competitive, he said.

Taxpayer Risk

“A broad QE program can -- bypassing parliaments and governments -- lead to a redistribution of risks between taxpayers in the member countries, unless the purchases are limited to the countries with the highest credit rating or each central bank purchases bonds at the risk of its own country.”

Weidmann acknowledged that market expectations of sovereign-bond purchases have been heightened since the ECB’s last monetary-policy meeting, at which Draghi pushed through a commitment to expand the balance sheet by around a trillion euros ($1.25 trillion), and said it’s good that the debate over policy is a lively one.

“Markets at some point have to learn that not every expectation, not every wish, will be fulfilled,” he said. “It’s maybe not so bad when the impression arises that the debate on the Governing Council doesn’t resemble a group of lemmings all running in the same direction.”

(Updates with comments from Weidmann in sixth paragraph.)
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