The ECB should extend its bond-buying programme
Slowing growth in the eurozone makes quantitative easing as important as ever
The European Central Bank is signalling that it intends to end its €2.5tn quantitative easing programme next month. Mario Draghi, ECB president, made that clear at the bank’s monthly meeting in October. Yet the recent eurozone growth numbers were the weakest since 2014. The danger for the ECB is that it will have to start QE up again soon after ending it.
Germany and Italy are the principal culprits here. In the third quarter of 2018, German car production and exports were disappointing, largely because of the emissions scandal.
This is expected to be temporary. But the US-China trade dispute, which is not going away, is having an impact on German exports. And with the Italian economy stagnating, the strong and the weak are conspiring to make QE as important as ever for the health of the European economy.
Yet, the ECB says it wants to end the asset purchase programme before the fourth-quarter results are in. What’s the hurry?
According to one of the more influential dovish members of the bank’s governing council, QE is running out of ammunition. This argument is valid as long as the council’s self-imposed rules for buying government securities — the so-called capital key and issue limits, for example — remain in place.
But the governing council is reluctant to change the rules. This is largely because it does not want to jeopardise the recent favourable ruling from the European Court of Justice’s advocate general, Melchior Wathelet, that QE did not infringe a ban on directly financing the debt of eurozone governments under EU law.
Fortunately for the ECB, it does not have to change the rules while waiting for the next set of economic results to come in. It can merely “stretch” them to see how transitory the economic weakness turns out to be.
The ECB certainly has good reason to be concerned about future German export growth with President Donald Trump threatening to impose tariffs on European car imports into the US. But Mr Trump has just postponed a decision to pull the trigger on tariffs. Although the threat is not going away, we will have a better idea of his long-term intentions in a few months. In such circumstances, why not wait and see?
A further reason for the ECB to rush a decision on ending QE is that it faces big decisions over who will follow Mr Draghi as president and Peter Praet as chief economist. The two matters are closely connected.
The doves on the governing council know that Germany is against QE and also exerts considerable influence over who gets the top posts in the ECB. It is the Germans, after all, who questioned the constitutionality of the asset purchase programme.
To keep Germany sweet on the candidates the doves favour, the latter appear willing to reward it by ending QE at the end of this year. This is typical of the kind of horse-trading that goes on behind the scenes in Frankfurt.
From the point of view of German domestic politics, getting the ECB to abandon QE would be useful for Angela Merkel, the chancellor, as she fights to maintain influence inside her centre-right party, the CDU, after her decision to stand down at the end of her current term in 2021.
Ms Merkel already has been attacked by conservatives for offering lukewarm support to Jens Weidmann, Bundesbank president, as a possible successor to Mr Draghi. There have also been press reports that Berlin will support Philip Lane, current head of the Irish central bank, to be the next ECB chief economist. Ms Merkel would be able to fend off conservative attacks more easily by pointing to an early end to QE.
This could and should change now with the increase in downside risks for the eurozone economy. In such uncertain times it is surely risky to base policy on personnel considerations.
The ECB needs to revert to its traditional “wait and see” mode. It should extend QE for another three months, stretching the rules if necessary before deciding upon a more permanent course of action.