Economics: Wait goes on for ECB presses to roll

Mario Draghi hosted his first press conference in the ECB’s imposing new skyscraper in Frankfurt. Somewhere in the basement of this glassy edifice stands a brand new printing press, primed for action but dormant still as ECB governors hold back to the last on quantitative easing (QE) . They’d want to get a move on.

Draghi’s pronouncements would appear to bring that fateful moment one step closer, although divisions persist within the bank.

The ECB’s new forecast for both inflation and growth is “substantially” lower. But this does not yet account for the full impact of the recent precipitous drop in the price of oil.

It all serves to magnify deflation risk and, with that, potential to plunge the moribund euro zone economy into self-reinforcing recession as consumers postpone purchases because they believe prices will drop further.

The ECB is stepping up technical preparations for QE, in which the bank would print money to buy the sovereign bonds of member states in an attempt to jump-start inflation and growth. Draghi pointedly said QE has been proven to work in the US and Britain. He insisted such an initiative would come within the ECB’s legal mandate, and added that the unanimous backing of governors would not be necessary. Yet they continue to delay.

Balance sheet

“Early next year the governing council will reassess the monetary stimulus achieved, the expansion of the balance sheet, and the outlook for price developments,” Draghi told reporters.

Early next year could mean anything.

“Should it become necessary to further address risks of too prolonged a period of low inflation, the governing council remains unanimous in its commitment to using additional unconventional instruments within its mandate.” But we’re still waiting for Mario – or waiting for the German faction in the bank.

Draghi might well say “I’ll go on” whenever Bundesbank chief Jens Weidmann says “I can’t go on”, but the Italian chief is not in a position yet to proceed.

It was only last week that Sabine Lautenschlaeger, Germany’s representative on the ECB’s six-member executive board, said the time had not yet come to buy up sovereign bonds. So how bad exactly must things become before intervention – and when?

Very bad indeed – and only at the last minute.

This mirrors previous ECB explorations of its mandate. The bank is habitually wary of moral hazard, providing undue comfort to political leaders that it can be relied upon to clean up after their mistakes. Yet there comes a moment in every moral hazard debate when concern to overcome the danger presented overrides objections grounded in principle. That point now seems to loom, even if caution dominates.

Programmes

And the divisions are clear. Citing ongoing programmes to buy asset-backed securities and covered bonds, Draghi says current stimulus measures were “intended” to increase the ECB balance towards its enlarged scale at the start of 2012. While that marks a subtle shift from a previous statement that a balance sheet increase was only “expected”, even the simple change of wording did not receive unanimous support among governors or at executive board level.

There remains anxiety within the bank that the effectiveness of special funding measures already in train to stimulate bank lending should be fully assessed before a move into QE.

It is already clear, however, that initial take-up in September disappointed. Another funding round takes place next week.

At the same time more action may be in play than foreseen previously. It was but one week ago that Draghi’s deputy Vitor Constancio indicated pretty clearly that any bond-buying would be carried out according to the bank’s “capital key”, in which member states’ ECB bonds are bought in line with the proportional size of their economies.

That would have meant that more German bonds would be bought than French bonds and so forth, with the likes of Ireland to receive only 2 per cent of any bond-buying. The latest signal from Draghi is that this proposal constitutes only one of “several” under discussion.

The ECB appears to be rushing slowly but that’s the way it works.

The new headquarters – it cost €1.3 billion – has been in the planning since the ECB’s formal establishment in 1998, yet only now has it opened for business. For Draghi and the wider euro zone, time is marching rapidly on.