On the face of it, the ECB has many reasons to launch QE. For two years, inflation has consistently failed to reach the 2% target. In November, the annual price growth was just 0.3%, while the recent collapse in oil prices will generate further downward pressure in the coming months. Even more important, inflation expectations have started to de-anchor: forecasters and investors expect the undershooting of the target to persist over the medium term.
Low inflation is already a serious obstacle to economic recovery and rebalancing within the eurozone. Outright deflation would be an even more dangerous threat.
Moreover, financial markets consider QE so likely that the largest part of its bond-rate and exchange-rate consequences have already been priced in. Should the ECB disappoint expectations, bond and foreign-exchange markets would confront an abrupt and damaging unwinding of positions: long-term interest rates would rise, stock markets would sink, and the exchange rate would appreciate. That is not what Europe needs as it struggles to achieve in a year the growth that the United States has already recorded in a single quarter.
Yet hesitations are palpable. Jens Weidmann, the president of the German Bundesbank, remains openly skeptical. Though Weidmann does not deny the risk of deflation, he argues that the consequences of recent price data may be less serious than believed, while those of full-fledged QE could be more serious than assumed. Several of his colleagues share his reservations.
It is important to understand why there is still no agreement in Frankfurt on the best possible course of action. At a time when the US data seem to validate the Federal Reserve’s strategy, why is the ECB hesitating?
Contrary to conventional wisdom, the issue is not one of pure doctrine. Yes, the Bundesbank fiercely opposed the ECB’s conditional support of debt-distressed eurozone members and backed legal challenges to Draghi’s innovation, the Outright Monetary Transactions (OMT) scheme. But German officials do not dispute the legitimacy of wholesale bond purchases for monetary-policy purposes, and that there can be circumstances that require QE.