A commitment issued last week by European Central Bank president Mario Draghi that the bank’s governing council is prepared to inject up to 1trn euros into the monetary system through asset purchases has nothing to do with providing a boost to the real economy.
Rather it is a pledge to the banks and financial speculators, both in Europe and internationally, that the ECB stands ready to assist them in conditions of falling inflation.
As expected, the ECB made no change to its main refinancing interest rate of 0.05pc, which it set in September. Consequently all attention focused on Draghi’s press conference amid reports there was dissatisfaction over his leadership style, reflected in a tendency to make off-the-cuff remarks that were not approved by the governing council.
Two months ago, Draghi indicated that the goal was to purchase financial assets to bring the ECB’s holdings back to levels last seen in 2012, implying an expansion of about 1trn euros. Following these remarks there were claims the proposal did not enjoy unanimous support and divisions had emerged in the ECB’s governing body.
The main opposition to quantitative easing measures has come from Germany, with some backing from other northern European countries.
The ECB president sought to assure financial markets that he had the full support of the bank’s decision makers. He insisted that the governing council was unanimous in its commitment to use unconventional measures, including asset purchases, ‘to further address risks of too prolonged a period of low inflation.’
The concern over low inflation and the threat of deflation arises from the fact that lower price levels increase the real debt burden on banks and other financial institutions.
Often faced with accusations from financial markets that it acts too slowly, Draghi said the governing council had tasked ECB staff ‘with ensuring the timely preparation of further measures to be implemented if needed.
At present eurozone inflation is running at just 0.4pc, compared with the central bank’s target of 2pc, with Draghi acknowledging that “risks are on the downside.”
Following the press conference, the euro fell by 0.6pc against the dollar to its lowest level since 2012 and stock markets rose, with the FTSE Eurofirst 300 up by 0.6pc.
Draghi sought to play down reports of divisions, saying there was a ‘very rich and interesting discussion’ at a dinner on the evening before the council meeting. He added that concerns over his leadership style ‘were not raised so far as I know.’
While there is general agreement in financial markets that Draghi has prevailed in the short term, the longer-run divisions persist. Richard Barwell of the Royal Bank of Scotland told the Financial Times that Draghi won the battle of the balance sheet target but whether he won the war remained to be seen. “I doubt the hawks offered an unconditional surrender on sovereign purchases,” he said.
The term ‘sovereign purchases’ refers to the buying of government bonds by the central bank. These purchases were at the centre of the quantitative easing programme of the US Federal Reserve, which ended last month, and the stepped-up asset purchasing programme of the Japanese central bank, announced last Friday. The ECB has not carried out such measures because of opposition from Germany, which insists they go beyond the ECB mandate.
Pressure on the central bank to take action has grown following last week’s shock decision by the Bank of Japan to intensify its programme of quantitative easing. The BoJ will now undertake purchases of government bonds at a rate equivalent to 15pc of GDP) per year. This will push down the yen’s value and increase the relative value of other major currencies.
Despite the injections of money by the ECB, small and medium sized enterprises, whose expansion is vital for economic growth, face continuing difficulties obtaining credit because banks are weighed down by bad debt.