No More Excuses for Draghi
For months, European Central Bank President Mario Draghi has hinted that he's ready to announce a full-blown program of quantitative easing. Yesterday the EU Court of Justice's advocate general cleared away a possible legal obstacle. With prices in the euro area now falling, any further delay would be inexcusable.
The euro zone has gone from bad to worse, and it is dragging the world economy down with it. The World Bank just slashed its 2015 growth forecast for the euro area to 1.1 percent, down from June's estimate of 1.8 percent. The forecast for global growth was cut to 3 percent from 3.4 percent. Europe's economies desperately need an injection of demand, and the ECB can deliver that with QE.
Yesterday's legal finding said that ECB purchases of sovereign debt are permissible. It referred to an existing ECB program called Outright Monetary Transactions -- which isn't quite QE but which does involve purchases of government bonds. The court won't rule for another four to six months, but it's likely to follow the advocate general's guidance. That's good enough for Draghi to act now.
Many in Europe, especially in Germany, remain opposed. They see QE as a ruse by which the richer members of the currency bloc will end up paying for the fiscal misadventures of their neighbors. They point out that Europe's single-currency treaty forbids "monetary financing of the member states." Hans-Werner Sinn, head of Germany's highly regarded Ifo economic institute, this week accused the ECB of scaremongering about deflation to justify bailing out the weaker economies.
These reservations are understandable, but when the treaty was drawn up, nobody envisioned a recession as severe as the one Europe now finds itself trapped in. This is an economic emergency, and exceptional measures are needed. The U.S. Federal Reserve has shown that QE can provide needed monetary stimulus when interest rates cannot be cut any further. No plausible alternative presents itself.
The new legal finding isn't as permissive as it should have been. It opposes bond buying in the so-called primary market, restricting the program to secondary-market purchases of existing securities. That's a pity, because it narrows the ECB's options. The finding, again needlessly, warns about price distortions resulting from the ECB's holding on to bonds until they mature. But its main point -- that monetary policy should be for the ECB rather than the courts to design -- is wise.
There's a risk that, despite this green light, the ECB will still act too cautiously. The ECB's balance sheet has grown by about 10 percent since the bank started purchasing asset-backed securities in October, and stands at 2.2 trillion euros ($2.6 trillion). The Fed's balance sheet recently topped $4.5 trillion. Draghi has talked about the need for an expansion of 1 trillion euros; the options studied by policy makers earlier this month were limited to half that amount.
The next ECB meeting is on Jan. 22. Markets expect Draghi to act. Anything short of an open-ended commitment to buy government debt in impressive quantities will disappoint investors and worsen the euro area's plight.
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