ECB officials fret over quantitative easing

Looking out from the top of the ECB’s new tower in Frankfurt, it’s easy to find dark clouds on the horizon. 

The view for policymakers is of a eurozone populace so weary of years of economic turmoil that it’s increasingly electing politicians who say no to pan-European co-operation, and spurn reforms that the ECB says are vital to revive the economy.

Trapped by their mandate to prevent deflation, officials fret they might soon be forced to roll out quantitative easing that can never succeed by itself. In speech after speech, central bankers led by president Mario Draghi have urged governments from Paris to Rome to complement ECB stimulus by overhauling economies and bolstering investment.

The response — national foot-dragging on reform and an infrastructure plan from European Commission president Jean-Claude Juncker that won’t deliver spending until well into next year — has disappointed.

“The ECB might just be powerless,” said Daniel Gros, director at the Centre for European Policy Studies in Brussels. “There are domestic political constraints about which, at the EU level, they can do nothing. The crowd which is yelling for stimulus is basically southern Europe. They say the ECB should do its duty, whatever the governments do.”

That tussle provides another dimension to Draghi’s pressure on policymakers as they prepare for their meeting this week. He said on November 21 that officials should stoke inflation “as fast as possible”.

Eurozone governments find themselves hamstrung by the growing popularity of protest parties. That’s limiting their room to push through unpopular changes such as making it easier to shift workers from unproductive jobs to retraining, or raising the age of retirement. The threat of early elections in Greece, Catalonia, Italy, and Austria leaves the ECB looking on in dismay as a small window of opportunity for action narrows.

Draghi’s solution to Europe’s political paralysis and economic malaise is the opposite of what the anti-EU parties argue for. There’s a “lack of confidence in the future and lack of trust between member states”, he said in September. “There’s a strong case for sovereignty over relevant economic policies to be exercised jointly.”

The EU answer is Juncker’s investment plan, unveiled last week, which aims to use €16bn from the EU budget and €5bn in start-up cash from the European Investment Bank, leveraged to support infrastructure projects of €315b. It doesn’t require member nations to commit new money, and will take time to implement. Draghi has welcomed it, while urging a fast deployment.

“Europe needs it now,” said Gregory Claeys, a research fellow at the Brussels-based policy group Bruegel.