The ECB's Covert Monetary Financing Is Risky Business

The European Central Bank introduced, by a large majority, a new twist to its stimulus agenda Thursday. From here on, the principal repayment on government bonds purchased under QE will be used to buy more bonds. It's hard to overstate the significance of the reinvestment provision, which ECB Board Member Yves Mersch called "the most important" element of Thursday's announcement.

ECB President Mario Draghi tried his best to have it both ways. He portrayed the move as an extension of the QE timeline, which it is. But he denied that in doing so the ECB was blessing a kind of "monetary financing," which it is also doing. That practice, forbidden under EU treaty rules, refers to the financing of government expenditure directly through money creation.