Draghi has month to win over QE doubters

Mario Draghi has one month to win consensus on quantitative easing by reassuring those worried that the European Central Bank risks losing its own money.

As officials prepare to consider sovereign-bond purchases on January 22, the ECB president is working to get as many policymakers and as much of the public on his side as possible.

One concession being debated is to require national central banks to be responsible for at least some of their own credit risk, according to people familiar with the talks. Mr Draghi’s chief mission in the next 31 days will be to counter arguments that a quantitative easing package designed to revive inflation will instead see the ECB loading up with junk assets at high prices to bail out negligent governments.

While he might never convince more vocal opponents such as Bundesbank president Jens Weidmann, he can strengthen his position by crafting a programme that addresses the concerns of doubters. “In case of sovereign quantitative easing, it’ll be difficult to square the circle to make everybody happy,” said Marco Valli, an economist at UniCredit in Milan.

“But they are trying to make it as consensual as possible, bringing on board some of the smaller states. It would be important for the credibility of any sovereign quantitative easing programme to reduce dissent as much as possible.”

Mr Weidmann has argued that aside from the question of whether government-bond purchases are legal, there’s no need for more action now.

He has said a slump in oil prices will provide a “mini-stimulus” to the economy. Yet the same slide is proving a concern for Mr Draghi because of the risk that it feeds through into inflation expectations and tips the euro area into a deflationary spiral. The ECB wants to prevent a “dangerous vicious circle of declining prices, rising real wage costs, falling profits, shrinking demand and further declining prices,” vice president Vitor Constancio said in an interview with Wirtschaftswoche published on Saturday.

Not responding in defence of its mandate to keep prices stable “would be illegal,” Mr Draghi said on December 4 after strengthening the Governing Council’s official statement to say stimulus is intended to expand the ECB’s balance sheet by as much as €1tn. In a preview of the disagreements he might face, that change — the council previously said stimulus was “expected” to boost the balance sheet — was opposed by a quarter of the 24 policymakers, including half the six-person executive board.

While some of those opponents are still likely to support quantitative easing, reservations remain on how it would gel with government reforms, risk distribution, and an EU ban on monetary financing.

* Bloomberg