Mario Draghi couldn’t supress a grin when he was asked by reporters about exactly when the European Central Bank might consider taking its next major unconventional step to rescue the euro zone’s economy.
“Early means early. It doesn’t mean at the next meeting,” Mr. Draghi said at his monthly press conference in Frankfurt on Thursday.
While he wouldn’t be any more concrete on the timing of the next move, it was clear that Mr. Draghi was in a good mood. He had won the argument. Quantitative easing, the large-scale purchase of government bonds, is on its way to Europe. And it is coming despite Germany’s opposition.
The president of Germany's Bundesbank, Jens Weidmann, was quick to double-down on his doubts about bond purchases in a speech on Friday, but opposition from at least one other quarter - Austria's central bank - already seemed to be softening.
Jörg Krämer, chief economist of Commerzbank, said it was around 70 percent likely that quantitative easing will arrive early in the new year. Other ECB observers put the probability as high as 90 percent following Thursday's press conference.
Marcel Fratzscher, head of the Berlin-based economic institute DIW, said Mr. Draghi has clearly succeeded in pushing through a measure that seemed unthinkable only a year ago.
For markets around the world, the question now seems to be three-fold: When exactly will it come? What exactly will the ECB be buying? And just how many of Mr. Draghi’s fellow central bankers on the ECB’s governing council will support the measure when it comes?
What seems clear is that Mr. Draghi is willing to countenance some opposition to his plans, mostly from Germany’s central bankers. Gone are the days when Mr. Draghi would woo Mr. Weidmann over wine and chips in his office, pleading with the representative of Europe’s largest economy to go along with him on his next ambitious moves.
“We don’t need to have unanimity,” Mr. Draghi said flatly on Thursday, when asked about whether he was willing to push through quantitative easing. “It’s an important monetary policy measure.”
This is certainly true. Like most other central banks around the world, the ECB does not need all of its governing council members – the body that decides on interest rates and other monetary policy measures – to vote in favor of new steps. But unlike other central banks in the U.S. or U.K., where votes against the majority are quite common, the ECB has usually strived to present a united front.
Analysts said this has not changed entirely – Mr. Draghi still wants a strong majority in favor of his steps. Nor would it be the first time that Germany has voted against the ECB’s majority on a controversial measure during the euro zone’s debt crisis. Two former German central bankers - Jürgen Stark and Axel Weber - even resigned in opposition to earlier ECB moves.
Mr. Weidmann on Friday signalled he would not give up his opposition. In a speech in Frankfurt he said that just because quantitative easing was successful in the United States or implemented in Japan “doesn’t mean it can simply be transferred to the euro area.”
Mr. Draghi’s comments signal that he is increasingly willing to challenge the orthodox views of Germany’s central bankers and that he’s openly willing to go over the head of the Bundesbank.
“He may have given up on getting the Bundesbank to go along with further measures, but I think he’s working very, very hard to get pretty much everybody else, ” said Jacob Funk Kirkegaard, a former Danish government official and now senior fellow with the Washington-based Peterson Institute for International Economics.
“It is very clear that this continuing drawn out step-by-step expansion of QE suggests to me that he wants an overwhelming majority,” Mr. Kirkegaard added.
In other words, Mr. Draghi is looking past the Bundesbank to other pockets of resistance. These include the heads of central banks in Austria, the Netherlands, Estonia and possibly others.
Dutch central bank governor, Klaas Knot, said last month that while he would not “categorically” rule out government bond purchases, he was skeptical of its effectiveness, given how yields on government bonds have already fallen. Austrian central bank governor, Ewald Nowotny, has advocated a “steady-hand policy” rather than jumping to new steps.
On Friday, Mr. Nowotny left himself open to being persuaded. At a press conference in Vienna, he said that while the ECB's council didn’t want to fire any “quick shots,” it would “keep open the possibility” of considering more steps next year if the economic situation warranted.
While some market participants were disappointed that the European Central Bank did not announce additional measures already on Thursday, it seems likely that Mr. Draghi is waiting until he has a groundswell of support. The former Italian central banker has his work cut out for him. While it is clear that he has a majority, as many as a quarter of the council's 23 members are reportedly skeptical of the move.
Most ECB observers suspect he will probably succeed in convincing the skeptics – either by the ECB’s meeting in January or by its meeting in March. Unlike the Bundesbank, which largely opposes quantitative easing on ideological grounds, other central bankers are more focused on whether the economic situation has become serious enough to justify such a move.
Take Mr. Knot, head of the Dutch central bank. Nick Kunis, an economist with the Dutch Bank ABN Amro, argues that Mr. Knot’s objection to quantitative easing is “more practical rather than philosophical… therefore he certainly could under certain circumstances back a quantitative easing plan, including a quantitative easing plan which included government bonds."
The same goes for the head of Austria’s central banker Mr. Nowotny. Stefan Bruckbauer, chief economist of Bank Austria, argued that Mr. Nowotny and other skeptics could well be convinced if inflation in the euro zone takes another turn for the worse next year.
This seems very likely. Many economists predict that inflation in the euro zone could fall from 0.3 percent in November to 0.0 per cent as early as this month, and could possibly even turn negative in January. Mr. Draghi warned on Thursday that the global fall in oil prices could continue dragging down prices in the euro zone.
Aside from the dangers of deflation, the ECB is worried that markets will start to doubt whether the central is really committed to raising inflation back to its target of close to 2 percent. Mr. Draghi warned on Thursday that it would be “illegal” for the ECB not to do what it can to achieve its mandate of price stability.
Mr. Bruckbauer of Bank Austria said the path of inflation expectations will be key going forward. If markets start to believe inflation will not return to 2 per cent in the coming years, this would “strongly increase the pressure on the skeptics” to support additional ECB measures.
But he warned this might take longer than some market participants expect. The market “underestimates that the hurdles are higher than they think.” Discussions about quantitative easing, in Mr. Bruckbauer’s view, could drag on until the spring.
Christopher Cermak is an editor with the Handelsblatt Global Edition in Berlin and has covered the central banks both in Frankfurt and in Washington DC. Jens Münchrath leads Handelsblatt’s coverage of monetary policy and economics in Düsseldorf. To contact the authors: [email protected] and [email protected]
This story was updated on Friday at 15:15 CET following speeches by Bundesbank President Jens Weidmann and the Austrian central bank governor, Ewald Nowotny.