How Bold Can the ECB Be?
The European Central Bank is expected to make news Thursday by announcing a set of unconventional measures aimed at enhancing the prospects of a healthy economic recovery. Some even expect a replay of the high drama of two years ago, when the central bank moved in a surprisingly bold fashion to avert financial disaster.
Such a comparison, as tempting and hopeful as it is, will likely prove wanting. This time around, the ECB will be less confident, less open-ended and less effective overall.
In venturing deeper into experimental policies, the ECB will be responding to concerns about inflation that has been too low for too long. It also hopes to provide stimulus to a recovery that remains frustratingly and worrisomely muted, as yesterday's release of the May manufacturing purchasing managers' indexes illustrated.
Yet this time around, ECB President Mario Draghi will be hard pressed to put his personal credibility on the line, as he did in July 2012. Back then, in promising to do "whatever it takes" to hold the euro area together, he said "believe me, it will be enough." The central bank does not have a dominant influence on, let alone control of, inflationary expectations and key drivers of economic growth.
Also, Draghi can't make such open-ended commitments, suggesting a willingness to implement wave after wave of unconventional measures until the central bank's objectives are fully met. Instead, the ECB must limit itself to a discrete set of measures. Given the potential for unintended consequences, more ambitious promises simply wouldn't be credible.
As a result, the outcome is likely to be less decisive, both immediately and in the longer term. We should expect few dramatic and sustained moves in financial markets even if the ECB's policy announcement is quite bold (with the notable exception of currency markets). There's only so much the ECB can do to boost expectations of inflation and growth unless other national and regional policy makers address the structural and competitive impediments that are holding back the economy and becoming more embedded with each passing day.
All this is not to say that the ECB will not make history on Thursday. Its announcement will likely include measures, such as negative interest and credit easing, that would have been unthinkable not so long ago. What the central bank does will deserve more than a footnote in the history of the euro's first major crisis since its creation in January 1999, and thus of Europe's monumental integration project. But it probably won't merit a full chapter.
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