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Updated at 4.57pm
THE EUROPEAN CENTRAL bank today prepared financial markets for an imminent programme of sovereign bond purchases, with president Mario Draghi saying the bank had few other options at its disposal to counter the risk of deflation.
A day after ECB executive board member Benoit Coeure had said that the central bank’s governing council was in a position to announce such a programme at its first policy meeting of the year next week, Draghi upped the ante still further.
“All members of the ECB’s governing council are determined to fulfil our mandate,” he told the weekly newspaper Die Zeit, when asked about his plans to launch a controversial programme of large-scale buying of government bonds known as quantitative easing or “QE”.
The central bank’s mandate is to keep price inflation at just under 2%, but it fell to a negative 0.2% in December, raising fears that the eurozone could fall into a cycle of damaging deflation where falling prices lead to job losses and lower output.
“Of course there are differences about how we can do that. But it’s not as if we have an endless amount of possibilities,” he said.
The comments will fuel speculation that the ECB’s governing council will announce plans for a programme of some form of QE at its meeting on January 22.
Other central banks around the world have used QE programmes to kick-start their economies.
The Germans aren’t happy
But there are critics of such a programme in Europe, notably the Bundesbank or German central bank, which believes QE will take away the pressure on governments to reform their economies and is effectively a licence to print money to get them out of debt.
Under QE, central banks in effect create money to buy sovereign bonds, and thus government borrowing costs fall, but the objective is for the funds to find their way back into the economy through investment and spending.
Just yesterday, ECB executive board member Coeure had said discussions about a QE programme were “very far advanced”.
“We had a discussion last week on many of the technical details. We are definitely in a position to make a decision on January 22,” when the ECB’s policy-setting governing council meets next, Coeure said.
“But that does not mean we will actually make a decision,” he added.
Bond-buying gets the green light
A group of euro-sceptics in Germany actually took the ECB to court over an earlier bond-buying programme called Outright Monetary Transactions or OMTs, arguing that such a measure overstepped the central bank’s mandate.
Last February, Germany’s highest court, the Constitutional Court, voiced doubts about the OMT programme and sent the case to the European Court of Justice.
But the ECJ’s Advocate General Pedro Cruz Villalon found that Wednesday that the OMT programme is “in principle” in line with European treaties.
ECB executive board member Yves Mersch said Wednesday he “took note” of Villalon’s opinion and said the OMT programme was still “ready and available”.
“We have always been of the conviction that OMTs are legally sound and in line with our mandate,” Mersch told journalists.
“As in the past, the governing council will always comply with EU law. The end does not justify all means,” he added.
The OMT programme was unveiled in August 2012 at the height of the eurozone debt crisis when financial market turmoil looked set to bring down the single currency.
While it has never been put into use, its mere existence has proven to be the most effective weapon against the crisis and has largely defused fears of an imminent break-up of the eurozone.
Draghi has a tailwind
Analysts said the ECJ opinion will give added tailwind to Draghi and supporters of QE.
“QE is not controversial from a legal viewpoint. If anyone had any doubts on this issue they should be gone now,” said UniCredit analyst Andreas Rees.
Berenberg Bank economist Christian Schulz agreed.
“It means that no additional legal hurdles stand in the way of QE, for which we see a 90 percent chance to be announced at one of the next two meetings,” he said.
But Anshu Jain, one of the co-chief executives of Germany’s biggest bank Deutsche Bank, said that QE is not the cure-all that its proponents believe it is.
“Our people are fairly sceptical,” he said an interview on the N24 news channel.
“It will weaken the euro, which will help Europe, but it’s structural reforms that will really help,” Jain insisted.
Additional reporting Peter Bodkin
No harm for Germany to feel a bit of financial pain. They didnt give a damn about inflicting it on Ireland so why should we give a damn about them. Bout time they realised that our monetary union is a double edged sword and they dont control it!
They’re not feeling financial pain… They’re traditionally adverse to quantitative easing as printing german currency post WWII to repay French, Italian and Brits lead to mass inflation and is widely thought to have lead to the rise in power of Hitler and and the Nazi party.
Thus the modern germany economy has been built on a policy of firmly controlling inflation.
*WWI
@ drew It was a period of deflation post the wall st crash that led to the rise of the Nazi party
James, that is historically correct and beyond sensible challenge.
It is not the Germans fault that they believed other countries would act responsibly and control their bankers.!
Godwin’s law
Great news. An inflation issue that happened in Germany 90 years ago can’t be used to constrict economic growth across Europe today.
WWII, The Holocaust, The death of 60million+ people, 3% of the world’s people….Described as ‘An inflation issue’
If that isn’t spin, what is?
I’m talking about hyperinflation in the Weimar Republic in the first half of the 1920′s
Great news,ya, get them to print a couple of hundred billion and pay of the death we got fecked over for
Glad to see Germany does not control as much as they thought they did. The Euro currency has been managed for their almost exclusive benefit since it’s inception.
Ireland is still financially bollo#ed, though. Our unborn children will be among the most indebted people in the world when they take up citizenship during the coming decades
“But there are critics of such a programme in Europe, notably the Bundesbank or German central bank, which believes QE will take away the pressure on governments to reform their economies and is effectively a licence to print money to get them out of debt.”
And there is the real problem..kick the can down the road until it implodes and Germany pulls the plug on the Euro debacle..
So let me get this straight.
Under the Prom Notes, Ireland was obliged to collect about €3 billion a year in taxes, hand it over to the Central Bank, who would delete it from the economy. This was fine and dandy with the ECB, because they didn’t want inflationary pressure. And we only got the ECB to sign off on the renegotiation because ultimately, the money will still be taken out of the economy.
But it’s ok for the ECB to print money to buy up national central bank bonds, because it eases deflationary pressures on the economy.
In which case, why don’t we start by telling the ECB to fook off with its inconsistent nonsense, and allow the Central Bank to put the money back into lending instead of deleting it? Since we have borne 47% of the bank bailouts, and €28 billion is only 15% of the €200 billion to be printed [and that's an official number, so you can imagine what the final number will be], I’m sure they could have no reasonable objection.
Elephant – you are very confused!
They can’t keep plastering up the cracks like this for much longer. Eventually the dam is gonna burst
The Elite are beginning to feel the heat .They can’t control the nationalist groups because their economic arguments have nothing to do with nationalism and national currencies that CAn devalue as a protection against the Elitist Banking culture that stretches back to
Lets hope they start by printing 84billion, and write on it RETURN TO SENDER addressed to Irish exchequer.
Stick that where the sun don’t shine Angie! !!!!
You do know the trillions will be heading into bankers pockets and actually devalue everyones wages and savings hence making everyone poorer. This money isn’t going into the man on the streets bank account by any means. It’s actually a massive redistribution of wealth from the poor to the rich, something that shouldn’t be celebrated by any means but necessity must.
Well this upcoming QA explains the reason for the rise in gold prices of late. As fiat currencies become even more ‘fiat’ than usual, commodities shoot up.
It’s more like an Amber light, complete fudge as per usual, a negative decision would have meant Ireland, Portugal, Greece, Spain and Italy being bailed out AGAIN by about 5pm this evening. Why anyone thinks money printing is the answer is beyond me. Draghi will do nothing and the Greeks will decide what happens next.
The rich get richer. QE is good in theory. But in practice it’s been shown to allow the rich to print money, buy stressed assets/bonds at knock-down prices in the hopes it eases pressure and encourage spending. Ultimately what happens is people see an initial improvement in their financial position…..but instead of spending (and driving the economy) people save, having just gone through hard times. It’s a risky policy.
Better off offering a write off to Greece, Ireland etc and offering substantially improved repayment terms. This will encourage instead of hampering growth and the likes of Greece will be less likely to welch on their debts. My two cents.
Start to love your European Union as that’s where you are holidaying for the next 5 years, while place like the Americas and UK will be too expensive.
Give Germany a break they habe given a lot to Europe
Gary gary, they are directly involved in the blackmail troica bailout in 2010, that insisted the bondholders wouldn’t be burned because they WERE the bondholders. So Gary since when did demanding money with menaces become virtuous.
Just look at that top photo – David Eikes may be right – the lizard people are ruling the world.
Unhappy Germans well I never
At the risk of provoking ridicule and hostility, I wonder if policies of austerity and penalisation have contributed to deflationary trends in Ireland and elsewhere in Europe?
Ireland stands worst in Europe from the inhibiting and higher cost of public debt repayment and public debt servicing costs exacerbated by deflation, increasing the real cost of repayment. (Where goes the real cost of serving the Prom Notes deal?)
I’m lacking in confidence in QE as the sole means of curing deflation.
I’ve worked out a careful strategy to maintain and worsen deflationary trends in Ireland.
1. Maintain high levels of personal mortgage debt and maintain the severe threat of Possession Orders for homes.
2. Ensure that the variable mortgage interest rate is maintained at a high level and even increased.
3. Ensure high residential rents.
4. Apply an increasing tax take from LPT on top of USC and make certain that there is uncertainty as to the future effect after 2016.
5. Preserve the water charges to mop up discretionary income
6. In case of any remaining income, devise new taxes such as the Broadcasting Charge, so as to soak up after tax income.
7. Apply charges for replacement water meters.
8. Privately assure the ECB and Germany that Ireland’s economy is in healthy recovery and that we don’t need to bank debt assistance from Europe. Make sure that we don’t get assistance.
9. Maintain austerity measures more ruthlessly, curtail funding for health, education and social protection and try to take as much spending power as possible out of the economy.
10. Apply measures to reduce consumer demand in all areas.
11. Ensure that people who can’t afford private health insurance must pay dearly for priority access to the health service.
After applying measures 1 to 11, review after 2 years. If any personal discretionary spend capacity is left over, apply austerity measures with even greater brutality. Ignore social and personal consequences. Take a short term view and remember that the solution to deflation is even more and more austerity.
All spending by sovereign fiat currency issuing governments creates new money. These states do not need to borrow their own currency from anywhere in order to spend as they are the monopoly currency issuer. For example, the U.K pays a public sector employee by simply crediting his/her bank account with computer keystrokes and then crediting the commercial bank’s reserve account at the Bank of England by the same amount. (Taxation is the reverse transaction and results in money being removed from the economy).
“OMT…….was unveiled by Draghi in August 2012 at the height of the eurozone debt crisis when financial market turmoil looked set to bring down the single currency.”
A bit more background on this. It’s really only the Eurozone countries that are required to borrow their own currency in the market at an interest rate determined by the market as the EU allows the financial markets to set the borrowing rate for Euro countries on an individual basis with the ECB is the sole issuer of the currency and the nations prohibited from creating the currency themselves. This by design allows the market to profit to a much greater extent on eurozone nation debt/bonds.
Market speculation drove the yields on Italian and Spanish bonds up to unsustainable levels in 2012. In order to prevent the collapse of the single currency, the ECB was obliged introduce OMT whereby they promised to purchase unlimited quantities of sovereign bonds on the secondary markets to drive the bond yields back down and prevent Spain and Italy exiting the Euro.
Coddler, as always an impressive and clear analysis which sensibly challenges orthodox thinking. I don’t dispute any of your points and I agree with most of your points which my limited knowledge allows me to understand fully and to know that you are correct.
A question? Do you consider that prolonged and severe austerity measures can cumulatively contribute to deflationary trends?
Mario Draghi: “Signora Merkel, we are printing the money because a’ this a’ will make a lot of people very appy.
Merkel: “Nein! Zis is bad for Germany!
Mario Draghi: “Hmm how to say this a’ in a nice way, Vafanculo!”
This is great news for property owners and exporters. Whatch the price of property take off! Sitting on your 20 or 30 million euro that some land owners got during the tiger years is now no longer a good idea. Its value will fall rapidly unless it is converted to assets that will hold value….eg. property! This happened in the uk.
The boom is about to get boomier.
Print away lads.
have your say