Two Cheers for Mario Draghi
Even in the modern era of forward guidance from central banks, today's introduction of a government bond-buying program in the euro region is one of the most hyped, anticipated and leaked policies ever. Still, the initiative risks delivering too little, too late, leaving the bloc struggling to grow and afflicted by deflation.
European Central Bank President Mario Draghi succeeded in springing two small surprises. His quantitative easing effort is about 20 percent bigger on a monthly basis than was flagged yesterday, although the total goal is about the same. He also promised that the mooted deadline can be extended if the plan doesn't succeed in driving inflation back toward the ECB's target, delivering an open-ended commitment to purchases that's a bit half-hearted in its conditionality:
They are intended to be carried out until the end September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation at rates below but close to 2 percent over the medium term.
The inflation -- or deflation -- outlook has forced the ECB's hand, and given Draghi the firepower to force the Bundesbank's hand. Consumer prices declined by 0.2 percent in the euro region in December, a far cry from the bank's target. "There is little doubt that, in our view at least, one should act," Draghi said.
Buying 60 billion euros of debt per month between now and September 2016 will add as much as 1.2 trillion euros ($1.4 trillion) to the ECB's balance sheet, driving it to about 3.3 trillion euros. That still leaves the ECB behind its peers in the game of "inflate the balance sheet to goose growth." Here's a chart that shows why today's moves might turn out to be inadequate:
There's clearly been some hard negotiating with the Bundesbank, which opposed the introduction of quantitative easing. "There was a large majority on the need to trigger it now, so large that we didn't need to take a vote," Draghi said, adding that "there were differing views on the need to act now." The thorny issue of where the losses will end up in the event of a government defaulting has been fudged, with some shared among individual national central banks but the bulk staying with the ECB. And the ECB will buy bonds at negative yields if need be.
So, two cheers for Draghi. He's dragged the Bundesbank kicking and screaming into quantitative easing, and that clearly hasn't been easy. The bond market likes the initiative; Spain's 10-year borrowing cost declined to a record in the wake of the announcement. But it's been six long years since the Federal Reserve started QE in the U.S., and almost as long since the Bank of England hooked the U.K. onto life support. Those economies (and their consumers) are only now seeing the benefits. Euro voters may yet live to regret the ECB's delays.
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