Not Even Mario Draghi Can Save Europe Now
This is the biggest week of his career.
The actions that the European Central Bank will finally announce this week won't give the continent the boost it needs. That's for several reasons, but the main one hasn't changed: The European Union's system of economic governance is broken. What's remarkable is that Europe's governments haven't even begun to confront this larger issue.
After months of slowly escalating hints, understandings, analyses and preparations -- with inflation trending down all the while, most recently to less than zero -- ECB President Mario Draghi has no choice but to reveal some kind of quantitative easing program this week. The policy has been widely anticipated and priced into markets. If the central bank does nothing, reactions will be ugly.
Something pretty substantial will be needed just to avoid that. Yet precisely because a moderately sized QE program is expected -- of, say, 500 billion euros -- its arrival won't have much further effect. To deliver the necessary stimulus, the ECB needs to surprise financial markets with a bigger-than-expected announcement.
How could Draghi do that? A program of 1 trillion euros instead of 500 billion, for example, would be mildly surprising, and therefore mildly helpful. Far more surprising, and therefore much better, would be a program unlimited in scale and duration -- whatever it took, as he might put it, to push euro-area inflation back up to 2 percent.
Suppose Draghi decided, as he should, to go for outright shock and awe. Then he could add that the ECB would not regard its 2 percent inflation target as a ceiling so long as demand in Europe was insufficient. He could call on governments to increase their borrowing and tell them that the ECB would buy the new debt directly, in a coordinated monetary and fiscal expansion. He could say that monetary policy, as he understands it, includes the option of "helicopter money" -- and that the bank would shortly begin sending out checks to every EU citizen.
The problem is that the ECB has shown, again and again, that it is temperamentally and institutionally timid. These more radical proposals would divide its policy-making board and court political controversy, to put it mildly. They may also be illegal: The single-currency treaty forbids "monetary financing" of governments, and last week's guidance from the EU Court of Justice's advocate general was that sovereign debt purchases were sometimes permissible but subject to conditions. The guidance seemed to rule out coordinated monetary and fiscal expansion (through primary-market bond purchases); it voiced reservations about the bank's retaining bonds to maturity (imposing a limit on the duration of QE).
Legal or not, helicopter money would be a frontal repudiation of the monetary conservatism that Germany's government and others have sought to impose on the bank. The same goes for anything that looked like raising the ECB's inflation target.
Long before now, Draghi should have put his job on the line and pressed for large-scale, Fed-style QE. He knew what was needed. He should have recognized that consensus wouldn't be possible and gone ahead with a bare majority of support from his board. He should have challenged Europe's governments and Europe's courts to stop him if they dared. Instead, he abided by the rules, as well as by the European instinct to muddle through.
That's a shame, but Europe's prosperity should never have depended on a heroic central-bank president. Europe needs new rules -- to allow for coordinated fiscal policy and a more proactive central bank. Even now, EU governments can't bring themselves to think about it. New rules will likely require a new treaty, and at a time when the European Union is unpopular with its citizens, that's a prospect leaders dread. The price Europe has paid for this neglect is already huge, and it only continues to mount.
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