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What’s next for 2019 after ECB measures to save the Euro?

© Robert Steenland
European Central Bank in Frankfurt am Main
© Robert Steenland

European Central Bank (ECB) President Draghi confirmed on 13 December that its quantitative easing (QE) extended asset purchase programme (APP) would come to an end after almost 4 years. The “move of last resort” was taken in January 2015 and followed likewise decisions by the Federal Reserve (2008), Bank of England (2009) and Bank of Japan (2013). Circa €2.5 trillion of government bonds, public sector securities; corporate sector bonds; asset-backed securities and covered bonds were bought. 

It included monthly purchases of €60 billion in March 2015-March 2016; €80 billion in April 2016-March 2017; €60 billion in April 2017-December 2017; €30 billion in January 2018-September 2018 and €15 billion from October to December 2018.

Main beneficiaries were ‘‘periphery countries’’ such as Greece; Ireland; Italy; Portugal and Spain that struggle(d) to receive favourable interest rates on their government bonds during the height of the Euro crisis.

From purchasing to reinvestment

The announcement to halt QE came as economic growth prospects were adjusted downwards. Many concerns were expressed by Mr. Draghi, including geopolitical factors, protectionism, emerging market vulnerabilities and financial market volatility.

However, ECB assertiveness will not end anytime soon as it switches to reinvestment, mentioning it would ‘‘continue reinvesting, in full, the principal payments from maturing securities purchased under the APP…as long as necessary…’’

Therefore, APP’s bond and security payments will be reinvested for an indefinite time to soften QE’s end. Moreover, its primary interest rate tool (-0.4 percent) and main refinancing rate (0 percent) stay unchanged.

In 2015, the QE announcement accelerated the Eurozone’s recovery process, which had been stagnant. Mr. Draghi took credit, stating QE had been economic growth’s “only” driver in parts of the Eurozone.

Mr. Draghi was also forced in the past to calm markets. His “whatever it takes” pledge in 2012 arguably saved Greece from Grexit. The crucial ECB measure of to serve as a lender of last resort was considered to have saved the Euro without spending anything. 

Critique and controversy

However, The ECB’s actions and inactions were often criticised.

The IMF encouraged the ECB to be more assertive providing additional QE and apply the approach of the Federal Reserve in 2008 following the financial crisis. Its final 2015 QE announcement was considered too little too late by some.

Many also opposed the ECB’s actions. One argument was that it caused lower interest rates, which affected savers’ profits on their bank savings accounts.

German Bundesbank President Weidmann criticised it for removing pressure on national governments to pursue national structural reforms and strengthen the Eurozone. He also criticised earlier actions for causing inflation and merely buying governments time.

Striking as well had been the critique of former German Finance Minister Schäuble who attacked the ECB for fuelling support for the far-right Alternative for Germany party (AfD).

Court cases were also launched against ECB measures with the ECB being accused of overstepping its legal mandate but the European Court of Justice (ECJ) judged in the ECB’s favour.

A still fragile Eurozone

Mr. Draghi downplayed the ECB’s actions as time-buying and argued that the ECB measures needed to be supported by Member States’ structural reforms and fiscal policies.

Earlier in September, Mr. Draghi called for a ‘‘…additional fiscal instrument to provide stabilisation…that complements monetary policy in delivering macroeconomic stability both at the euro area level and, crucially, in each of its Member States.’’

In the 13 December announcement, Mr. Draghi’s reiterated such needs, calling the Eurozone fragile. Many economists agree. Given the differences of the Eurozone economies, a stabilisation function in the form of a significant Eurozone budget would be needed.

In a 15 December speech, Mr. Draghi said the Eurozone was not (as) beneficial for each member state, stating ‘‘This is partly the result of domestic policy choices and partly the result of the Monetary Union being incomplete, which led to insufficient stabilisation during the crisis.’’

However, such calls continue falling on deaf ears. The latest Eurogroup meeting proves the point, as merely minimal steps were made, as confirmed during the 14 December’s Euro Summit.

A European guarantee for bank deposits remains blocked. A Eurozone budget was planned only as part of the EU’s multiannual budget but would not be usable for the much-needed stabilisation function.

For fiscal responsibility there is also a long road to go. The quarrel by Italy’s new populist government with the European Commission on respecting budget rules (that nearly resulted in sanctions) and French president Macron’s recent spending promises to – amongst others – partially reverse a tax hike on pensions and not taxing overtime (in an attempt to stop the Yellow Vest protests) shows this remains a persistent problem.

A qualitative success?

To sum up: The ECB’s quantitative easing programme helped avoid a potential Euro disaster and national catastrophe(s). However, in absence of ambitious Eurozone reform, the ECB’s actions are no more than painkillers.

At some point, they will either run out or the patient will become resistant. The structural cure needs to be provided by national leaders, no matter how much they prefer to criticise the ECB.

The Euro celebrates its 20th anniversary on 1 January 2019. One can only hope it will receive a serious anniversary gift in the upcoming year.

Robert Steenland
The Brussels Times

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