Marsh on Monday: Another day of postponement looms for the ECB’s QE
The European Central Bank Governing Council is due to decide yes or no on full-scale quantitative easing at its first monetary policy meeting of the New Year on Jan. 22. I still think it will be a no.
Jens Weidmann, the frequently nay-saying Bundesbank president, launched the strongest and most detailed opposition so far to across-the-board government bond purchases to bring inflation nearer to the ECB’s target of below but close to 2%.
The thought that Draghi could launch QE and then depart in a blaze of glory for Rome, leaving the ECB to carry through a bond-purchase program highly beneficial to Italian state finances, must be the New Year’s most improbable blockbuster film script.
By laying out his thoughts to the Frankfurt International Journalists Club last week, Weidmann was indicating either quiet confidence — or desperation in view of the likelihood of being heavily outvoted at the council meeting. In my view, it is the former.
Almost certainly, he was spelling out arguments that, in private, he will be outlining (or has already outlined) to his former boss, Chancellor Angela Merkel, for whom he worked as economic adviser in 2006-11.
In short order, Weidmann claims that full-scale QE is unnecessary, risky, divisive, insecure, inflationary and counter-productive. Apart from that, he is fully supportive of the idea.
For the first time, Weidmann dropped clear hints of a legal filibuster under which the Bundesbank could call either for bond purchases to be limited to AAA-rated countries — or, even more controversially, for euro EURUSD, -0.01% members to purchase, at their own risk, solely their own governments’ bonds.
Don’t Become the Bank to Your Family, Friends
Many market participants betting on a yes to QE on Jan. 22 trust Merkel will back Mario Draghi, the ECB president, against her erstwhile protégé. They see her repeating her support for Draghi in September 2012 over the never-used outright monetary transactions program (which Weidmann opposed), foreseeing selective ECB bond purchases for countries that agreed additional austerity measures.
In my view, such interpretations ignore the very significant differences between the two episodes.
In September 2012 Draghi unveiled an initiative to protect the euro bloc from breakup, using the ploy of potential and highly conditional ECB bond purchases to aid countries that had overcome further tough reform-and-austerity hurdles. Two years ago, Merkel instinctively backed the Draghi measures. This was not really surprising. He effectively relieved her of the need to take highly unpopular, probably unrealizable action in the German Parliament to put taxpayers’ money directly at risk to aid struggling euro members.
This time round, it’s different.