To print or not to print: ECB policy debate

AS the Eurozone crisis rumbles on, European policy makers are fast running out of ideas. In recent weeks, the calls for the central bank to start printing have grown louder. But is this a wise route to take?

“Print your way out”
ROGER NIGHTINGALE
independent consultant
(Below, left)

If a motorist, driving along a hilly road, were to want to maintain a roughly constant speed, he’d use the car’s accelerator to offset the effect of gradient. He’d open the throttle in proportion to the steepness of an ascent, and close it in proportion to that of a descent. It isn’t rocket science. It doesn’t need a genius to understand the principle; it takes a buffoon not to.

It’s much the same with economics. If the authorities were to want to keep activity on an even keel, avoiding recessionary excesses in downturns and inflationary ones in upturns, they’d use credit policies to offset them. They’d tighten money in booms and loosen it in slumps. It’s not an intellectually-demanding procedure: central bankers don’t need multiple PhDs to understand it; they need only not to be idiots.

Sadly, many don’t meet the latter requirement. Demonstrating the point, there’s been a tendency in recent years to raise interest rates at the top of a cycle, and a corresponding willingness to lower them during an upturn. Downturns have thereby been steepened, and inflationary risks enhanced.

The ECB has been the worst offender. Exclusively concerned with maintaining the status of the euro, it’s ignored the real economy; cycles haven’t been dampened, but exaggerated. In consequence, peripheral countries are headed for 1930s-style depressions. A number of the members of the inner core will probably accompany them.

The financial markets, initially indulgent of the ECB’s incompetence, are now sceptical. Investors are convinced that the euro will disintegrate. They want to hold as little as possible of the weak components of the unit.

What should the ECB do? Recognise reality – abandon the currency and focus on the economy. Print money aggressively; devalue the euro forcefully. Additionally, all the Bank’s current employees should resign; and all previous ones revoke their pensions entitlements. Atonement.

“Hold the presses”
NICK BEECROFT
Senior markets consultant,
Saxo Bank (Below, right)

If the power of persuasion, coercion or even downright bribery (in the form, I hasten to add, of solemn promises to enact Eurozone-wide fiscal austerity and probity) eventually wins the day and the ECB drops the last of its principles to become lender of last resort to the struggling Eurozone periphery, then the debt crisis will surely have claimed by far its most significant scalp – the ECB’s reputation.

Wholesale purchases of sovereign debt, their quantum only limited by the total size of the issues available – because that is what would be required – may put a temporary end to the agonising circle of collapsing debt prices, leading to fears of bank collapses, leading to fears of more demands upon Europe’s state coffers, etc, etc.

The sad point is that this exercise would just be yet another pretend and extend scheme, which would do nothing to address the appalling underlying debt mountains or lack of labour competitiveness in these countries.

Following a brief, relief rally I think the euro may well subsequently fall rather precipitously, as a major bulwark underpinning the single currency will have been removed.

Why is it ok for the US Federal Reserve and the Bank of England to indulge in quantitative easing if it isn’t for the ECB? The huge difference lies in the field of possible unintended consequences.

The main danger that would accompany ECB quantitative easing is that of moral hazard. Shorn of the tiresome constraint of market discipline, it seems highly likely that peripheral countries may find ways to work round the new, supposedly tight rules that would have been the ECB’s quid pro quo for this momentous step.

The US and the UK both enjoy a very different status as age-old, established unions, bound by a common language and cultures.