The Bundesbank regards the president of the European Central Bank’s (ECB) scheme as akin to direct funding of governments, something forbidden by the EU Treaty for two good reasons. First, it involves a resource transfer between member states without democratic accountability. If the Bank of England buys British government debt, keeping yields down and making it cheaper to fund government spending, the resources to do that are not magicked from the sky. Instead, there is a transfer. Users of the pound lose out through inflation – their loss being the government’s gain.
In much the same way, if the ECB funds Spanish and Italian government spending, the resources come from the users of the euro as a whole. There is a kind of tax on Germans, Belgians, Finns, etc, with the resources raised being spent by the Italian and Spanish governments. Draghi’s scheme effectively taxes Germans to send money to Spain.
Secondly, once governments start being able to spend money printed by central banks, they find it hard to stop. Draghi’s scheme is supposed to be “sterilised”, so as not instantly to create inflationary pressure. But that does not escape the fundamental long-term risk. Once central banks become willing to fund government spending, longer-term inflation is likely to be higher.
We must ask how credible is Draghi’s claim that purchases will be “unlimited”? Suppose the ECB buys €1 trillion more Spanish and Italian debt. Will the Germans just accept that? Or will they vote with their feet and leave the euro? I think the risk of the latter means the scheme is not credibly unlimited. Indeed, it seems to me to be a bluff. Draghi hopes that if there is enough intervention to take down Spanish bond yields, Italian bond yields will fall, the Italian government will never apply for a bailout, and German patience will not be tested to destruction.
There are other big credibility questions. Draghi says ECB bond purchases under this scheme won’t rank ahead of the private sector if a country defaults. But we heard that before in respect of Greece. When it came to it those assurances were worthless. Similarly, the ECB never pulled the plug on Greece as it missed its deficit targets. Despite talk of “conditionality”, why should we believe Spain would be any different?
More generally, this is in truth yet another bank bailout. Spanish and Italian banks hold lots of their governments’ debts and, with high yields, those bonds have fallen in value, meaning more losses. The Draghi plan bails out those banks yet again, on the scale of trillions. Will the bank bailout madness never end?
Andrew Lilico is chairman of Europe Economics.