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Publié le
Lundi 02 Février 2015
In Northern Europe and especially in Germany, the decision by the European Central Bank to embark on Quantitative Easing (QE) has triggered an outbreak of accusations. Here is a survival guide for readers lost in indictments.
The ECB and Its Critics
  1. Zero inflation is a blessing: Wrong. If that were true, central banks throughout the world would have set it as a target. Instead, all of them define price stability as low, stable, but positive inflation. Zero inflation has three overwhelmingly negative consequences: first, it erodes the effectiveness of standard monetary policy (interest rates cannot go much below zero because this would lead depositors to withdraw cash from banks and put it in safes); second, it makes relative wages (of, say, manufacturing vs. services employees) more rigid, because wage contracts are generally set in euro terms; third, it increases the burden of past debts and makes exit from a private or public debt crisis even more painful.          
  2. There is no reason for worry because zero inflation is only the result of the oil price drop: Wrong. Consumer price inflation in the Eurozone has been below target for 22 consecutive months – long before oil prices started collapsing. Cheaper oil is a boon for growth but it also lowers expectations of inflation for the years ahead, which are the true target of monetary policy.
  3. Below-target inflation is needed to restore competitiveness: Confusing. It is true that competitiveness rebalancing within the Eurozone has not been completed yet. So some countries need to record below-average inflation to cut above-average costs. But this is not true of the Eurozone as a whole. Area-wide competitiveness depends on product quality and the euro exchange rate, which is flexible. Inflation is immaterial in this respect.  
  4. Monetary initiatives will ultimately result in high inflation: Unproven. Central banks can make mistakes. The one made in the Eurozone was to let inflation reach excessively low levels. Now the ECB is reacting with force, but as the Japanese case illustrate, exiting from deflation is far from easy. ECB President Mario Draghi may fail to bring inflation back to 2%. Or he may overshoot. Nobody knows. It is odd to claim that a speculative danger should prevent him from fighting the one that is all too real.   
  5. QE is illegal: Wrong. The prime responsibility of the ECB is to achieve price stability. When conventional interest rate policy becomes impotent, its duty is to rely on other instruments. The purchase of government bonds is explicitly authorised by the treaty.
  6. The ECB will create asset price bubbles: Probable, but partially solvable. Super-low interest rates lift asset prices in two ways: first, they increase the present value of the future income stream of a stock or a fixed-income bond; second, they make credit and the purchase of property more affordable. So asset price inflation is likely and public authorities will have to contain it through regulatory tools, such as credit limits.     
  7. QE will increase inequality: Probable, but it will also create jobs. The rise in the price of bonds, stocks and land will increase their owners’ wealth. Those without property will not benefit. But it will also help reignite growth and create jobs. It is the governments’ task to address the inequality consequences of QE and they have an instrument for that: taxation.     
  8. QE is just a way for the Eurozone to export its problems: Misleading. This was said of the US when the Fed embarked on it because aggressive monetary support inevitably weakens the currency. But ultimately, the US recovery helped partners more than it hurt them. The rule of the game of global monetary interdependence is that each country or entity should pursue price stability at home. The ECB has not departed from this standard.  
  9. Monetary activism will discourage structural reforms: Outdated. In the current context of protracted stagnation, the TINA (There Is No Alternative) argument for reform is losing strength by the day. Absent a visible pay-off, reform fatigue is setting in. The new policy mix should combine macro support and micro change.
  10. QE is a way to create Eurobonds through the backdoor: Wrong. A Eurobond is a pact among issuers offering each-other mutual guarantee. The ECB is independent agency and the decision to buy is its own. Furthermore, 80% of the risk will be borne by national central banks individually.    
  11. QE will destroy fiscal discipline: There is a risk, but it can be contained. Both the proponents of and the adversaries to fiscal discipline seem to agree that its days are over. It is true that central bank purchases will shelter governments from market pressure, but such pressure was already fairly ineffective. It belongs to governments to deliver their part of the bargain and ensure that they do not use the ECB’s initiative as an opportunity to forget their duties. This is what the EU fiscal pact is made for.     
  12. The monetary policy of the ECB is not geared to the situation of the German economy: True, but unavoidable. The ECB is responsible for the Eurozone as a whole. It cannot be perfectly suited to each country’s need at each point in time. The policy it conducted in the first ten years of the euro was too lax for Spain. Now it is too lax for Germany. Mr Draghi should not be blamed for doing his job.


Jean Pisani-Ferry
Anciens auteurs de France Stratégie

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