The Monetary toolbox Is ECB stimulus no better than a placebo?

As the ECB mulls a wind-down of its asset-buying program, economists have already begun a postmortem on its effectiveness. The central bank's mixed signals aren't helping matters.
Quelle: dpa
Spot the fake medicine.
(Source: dpa)

Sugar pills or the real thing? According to Daniel Gros, the German head of a prominent think tank, the multi-billion-dollar asset purchases by the European Central Bank have never been more than a placebo. The implication was that it was, in fact, a waste of taxpayers' money.

Speaking at a conference on ECB monetary policy in Frankfurt, Mr. Gros pointed to charts showing movements in the risk spread for Italian government bonds – that is, the premium investors demand to hold this paper above safer investments, such as German securities. After the ECB unveiled its bond-buying stimulus in early 2015, the Italian risk spread initially narrowed, but increased again later.

"Because they [the bond purchases] are only placebos, you might as well stop the treatment right away," quipped Mr. Gros, director of the Brussels-based Center for European Policy Studies.

Mr. Gros, who clearly thinks little of the bond-buying program, elicited a fierce rebuttal by Peter Praet, the ECB's chief economist. The latter was backed in the next instance by Elga Bartsch, the European chief economist of Morgan Stanley, who praised the bond purchases and their effectiveness.

Remember the joke about two economists producing three opinions?

We are not lenders of last resort. Peter Praet, ECB chief economist

Ms. Bartsch's point is simple. The ECB would have had to cut its interest rates even further – to minus 7 percent, to be precise – to achieve the same stimulus result without the bond purchases. Seen in that light, the program is anything but phony medicine.

Despite the discrepancy between the conclusions of Mr. Gros and Ms. Bartsch, both shared one bit of common ground that made Mr. Praet angry: They saw a dangerous mingling of monetary and fiscal policies.

Critics have long complained that the ECB's bond purchases have proven to be a form of reinsurance for government budgets. Put another way, the ECB has become a lender of last resort for lenders of last resort, turning risky bonds from cash-strapped EU members into supposedly safe investments.

"We are not lenders of last resort,” said Mr. Praet firmly, adding that that would make these government borrowers “careless.” The central bank has reason to be sensitive about the issue. In Germany, especially, the ECB is often accused of covert financing of the public coffers of EU members. Despite all his careful treading, to some extent Mr. Praet confirmed that the ECB, whether intentionally or not, is helping governments meet their budgets.

In any case, for the time being the stimulus will continue. Earlier on Wednesday, Mario Draghi, the ECB’s president, sounded a cautious note by saying that while he was more optimistic that euro-zone inflation would approach the bank’s medium-term target of “below but close to 2 percent,” further signals were needed. Annual inflation in the 28-nation bloc was 1.2 percent in February, down from 1.3 percent a month before.

Clearly, the central bank is struggling to read the euro-zone’s economic smoke signals. Mr. Draghi noted that the euro’s recent appreciation was faster than could be explained purely by the pick-up in activity. He also assumes there will be a clearer correlation between falling unemployment and rising prices in the future, as the economic cycle "normalizes" in the wake of the global financial crisis.

Once again, Mr. Draghi runs the risk of sending mixed signals to the financial markets. Last week, the ECB gave up its pledge to raise asset buys if necessary, a tweak in its policy message that was taken by financial markets as confirmation that it remains on course to end its bond purchases later this year. But Mr. Draghi's public comments have also made clear that the bank is prepared to keep the program going if needed.

The central bank is currently buying €30 billion in EU sovereign and corporate debt every month. Such spending, although disputed in its effect, is clearly more potent than a pile of sugar pills.Jan Mallien and Frank Wiebe cover monetary policy for Handelsblatt from Frankfurt. Jeremy Gray is an editor for Handelsblatt Global. To contact the authors: [email protected][email protected], [email protected]