Is the ECB out of ideas?

Photographer: Daniel Roland/AFP/Getty Images

More ECB Stimulus Raises the Question of Insanity

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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European Central Bank President Mario Draghi has all but promised to expand and extend the institution's quantitative easing program when the ECB meets Thursday. But the logic by which he arrives at the argument for more QE would challenge even Mr. Spock at his most Vulcan. It's worth walking through some of that thinking, and some of the anomalies it produces.

1. QE is designed to push inflation back up, toward the ECB's 2 percent target. The guardians of monetary stability are worried about drifting into deflation, which their well-thumbed textbooks warn them will persuade consumers to stop spending.

QuickTake Europe's QE Quandary

2. That hasn't happened. The collapse in spending, I mean. Negative inflation numbers are commonplace. Spain, for example, has had four consecutive months of falling prices, but consumer spending has remained robust and hit an all-time high in the second quarter of 2015, before declining in the third quarter.

3. Plainly, QE isn't working to avert deflation in the euro zone. Draghi's answer is to have more of it.  

4. QE is, however, working in some ways that Draghi won't admit to. The euro, for example, is at its weakest against the dollar in more than a decade, and has plummeted to $1.06 from $1.20 at the start of the year: 

Source: Bloomberg

The first rule of waging a currency war is that you don't talk about currency wars, no matter how fierce the battle to boost exports becomes. This is an argument for QE that you won't hear from the ECB. 

5. Some nations (well, one in particular) seem to be benefiting disproportionately from the ECB's largess. Others, not so much: 

Source: Bloomberg

This is ironic given that Germany raised the loudest objections to QE. It is doubly so if you are of the opinion that QE might have worked if only it had been introduced much earlier.

6. What do other nations get out of the deal? The QE bond-buying has reduced government borrowing costs, easing the burden on the most indebted euro members, such as Italy and Portugal, but also France and Belgium.

7. Not everyone is cheering, though. If your name is Greece, your bonds are still persona non grata at the ECB, which helps explain why your 10-year borrowing cost is 15 times higher than that of Germany.

8. So a policy that that hasn't worked to achieve the ECB's inflation target, but has supported German exports, and the purchase of sovereign bonds in more indebted countries, is set for renewal.

Remind me how Albert Einstein purportedly defined insanity. Ah yes: doing the same thing over and over again while expecting a different outcome.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net