Wait, what!? Wasn’t it the self-proclaimed goal of the ECB to save banks and thus sever the doom-loop connection between sovereigns and lenders? Yes. But it’s gone wrong. Here is why and what to do.
Even though the European public is by now used to ludicrously large sums the amount of the ECB’s latest interventions should raise concerns. The QE programme for sovereign bonds saps up bonds worth €80b every month, a quarter of it German. Now the ECB has put their eye on another way to shower the continent with freshly printed money: corporate bonds. As if sovereign debt QE wasn’t problematic (and ineffective for that matter) enough, as the experience of last year showed. Continue reading ECB’s bond purchasing programmes are reckless in several ways
There was a little Twitter exchange on the nature of the ECB’s QE programme between Paul de Grauwe and Marcel Fratzscher. Paul sees QE as a sort of debt relief and asks why the ECB grants such relief to Germany, France and Italy but not to debt-burdened Greece. If you think of QE as a sort of debt relief, Paul’s question is legitimate, after all Greece would benefit most from a debt relief. But that is not what QE is or should be. Continue reading QE is no debt relief
I am currently working on an estimation of a monetary union model I set up for my PhD thesis. For this, I need quarterly data of the output gap of Germany and France, which is surprisingly hard to come by. So I estimated it myself using real GDP data from Eurostat (unadjusted, chain-linked). For a very first glance, I de-seasonalised the data via moving-averages. After that, I employed the modified Hodrick-Prescott filter (mHP) as suggested by Bruchez (2003). Yes I know, the HP and mHP filters have their drawbacks and weaknesses, but they are nevertheless useful for a first look on the data.
There have been leaks of alleged minutes of an IMF high rank conference call about Greece. Allegedly, Poul Thomsen, Director of the IMF’s European Department and his colleagues agreed that Greece only decides on the brink of default (p. 6). While Thomsen is right that Greek decisions are taken in the most effective way only close to default, there is little the fund could do about it. Greece is technically insolvent and is only able to keep on going with the extensive support of the ECB (and the ESM), in fact it is only political will that keeps Greece afloat, so the whole arrangement is near-default anyway. So, the only institution able to exert influence on Greece is the ECB. But the fund is not at all in a position to have a sizeable influence on the developments in Greece anyway, neither economically, since the Greek debt is guaranteed by the ECB’s various unconventional monetary policy programmes, nor politically, since they are currently not taking part in the “rescue” programme. The IMF wants a debt cut (which German chancellor Angela Merkel refuses) and will until then stand on the sideline. Continue reading The IMF, Greece and the ECB
So, everybody and their grandmas are discussing something so absurdly wacko, that just a few years earlier, even mentioning it could very well cost you your professional reputation. But in times of QE and negative rates, the perception of “throwing money off a helicopter” is relatively less crazy. In absolute terms of course, it is still nuts. Continue reading Helicopters are for real disasters
New numbers of the consumer price index sparked again a debate about what monetary policy can do to fight off European deflation and thence the economic glum across the continent. In brief, in February the HICP fell by 0.2 percentage points an an annualised basis. Since the average HICP is the ECB’s preferred gauge for “inflation”, this would suggest further loosening of monetary policy – not to mention that monetary
policy is as loose as it never has been, and this for years. So you may have noticed that I have put the term inflation in quotes, since inflation is something else, but not (really) the change of the HICP. Continue reading Inflation is inflation is inflation. Or not?
As was expected, today the ECB cut its penalty interest rates on banks’ deposits further into negative territory to 0.4 from 0.3 per cent. Additionally, the ECB also cut its main refinancing operations rate to zero from 0.05 per cent and increased the volume of its QE purchases to 80 billion Euro per month, from 60 billion. As always, the ECB cited sub-par inflation due to slow credit growth as the reason for this policy move.
To my mind, this policy move is merely cosmetic, to keep up the mirage of the ECB’s prowess, where there is actually nothing Frankfurt’s Ostend can do to end Europe’s slump. For years now, Europe is stuck in a liquidity trap. And as we all know, in a situation where the transmission mechanism is broken, more liquidity will not help, that’s why it is called a trap. It seems worth to repeat, that no central bank, no matter how powerful, can monetise away a liquidity trap. Not even the ECB, not even with the fancy, shiny new policy tools of negative rates or QE. Europe’s problem is not liquidity supply, given QE and ultra-low interest, ultra-long provisions, money is everything but scarce. But two features of Europe’s economies make all this supply virtually void.
A bit more than two months ago in early December, there was much fuss about the ECB’s secret Anfa (Agreement on Net Financial Assets) and how the Central Banks of France and Italy allegedly misused it for additional monetary easing to the tune of roughly half a trillion euros, by buying sovereign debt. The public outrage over a secret agreement and using it to circumvent the prohibition of monetary financing, prompted the ECB to first release an explainer, that Anfa was quite the opposite of what was speculated in the media – but nobody believed it and politicians and economists (including myself) demanded the agreement to be made public. And on February 5th, the ECB did publish the text, along with the signatures of the NCB governors, the technical appendix and an extended explainer. Unfortunately, the agreement is a rather unreadable document, but nevertheless, I read through it and came to the conclusion that Anfa is actually bad, but not as bad as we may have thought. Anfa actually does what the ECB claims, namely to limit the amount of assets the NCBs may hold for non-monetary policy purposes. But there are several catches. Continue reading Anfa is not as bad as thought but still bad
Michael Burda (HU Berlin) schreibt auf VoxEU über drei unwahre Behauptungen über deutsche Volkswirte. (Englisch)