It's a Lose-Lose Situation for the ECB
The European Central Bank -- which has already carried a disproportionate burden in addressing the continent's economic troubles -- finds itself confronting a lose-lose situation.
At its policy meeting tomorrow in Frankfurt, bank officials will face legitimate criticism no matter what they decide to do about their quantitative-easing program, which entails direct purchases of securities. Yet this unfortunate bind speaks less to the ECB's inadequacies and much more to the prolonged and persistent failure of national politicians in Europe to respond with comprehensive and effective policies of their own.
Europe continues to lag in four areas that most economists deem important for the region’s ability to escape its alarming mix of low growth, high unemployment and shrinking potential.
First, political leaders in countries such as France and Italy can do more to enhance competitiveness, production and growth.
Second, individual countries such as Germany can do more to improve the level and composition of demand, including spending on infrastructure initiatives.
Third, more determined actions are needed to remove pockets of excessive indebtedness in countries such as Greece.
Finally, all of them would be well advised to work better together to supplement monetary union with closer fiscal, banking and political integration.
Because of repeated delays in each of these four areas, gross domestic product in Europe is essentially stagnant, deflationary threats are rising, and unemployment remains high and is becoming more deeply embedded by the day, especially among the young.
So far, the ECB, with its “whatever it takes” commitment, has succeeded in calming financial markets, halting financial dysfunction and gradually restoring a better flow of credit to the real economy. In the process, it has bought important breathing space for politicians to get their act together.
The central bank, both publicly and behind closed doors, has also taken a leading role in verbalizing what the comprehensive changes in policies should look like. Meanwhile, its president, Mario Draghi, has taken considerable personal political risks on several occasions in advocating fiscal flexibility and structural reforms.
Despite this, the bank again finds itself as the “only game in town,” an apt description used last month by the Banque de France’s governor, Christian Noyer, at its International Symposium in Paris. Tomorrow, the ECB's governing council must decide whether to stand pat or expand its securities purchases, which would put further downward pressure on borrowing costs while also boosting the prices of risky assets (such as stocks and junk bonds).
If the ECB refrains from venturing deeper into the experimental terrain of such unconventional monetary policies, it will be accused of not doing enough to keep Europe from getting trapped in a lost decade. After all, it is the one institution in Europe that has significant operational flexibility and political autonomy. But if the bank expands QE, it will be seen as resorting to a largely ineffective instrument whose collateral damage could well offset the few economic benefits that may materialize.
While this dilemma is placed at the feet of the ECB, only national politicians can deliver durable measures in the four needed areas. The longer it takes them to do that, the greater the detrimental impact on the ECB’s effectiveness and credibility -- all of which would leave Europe in an even tougher economic, financial and social bind.
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