FRANKFURT (Reuters) - The European Central Bank’s surprise interest rate cut and new schemes to bolster lending have allowed its president to swerve a thorny debate over full-scale money printing in the hope that such a move may never be needed.
Armed with a plan to lend to banks in return for giving credit to companies, a pledge to buy parcels of repackaged debt as well as record low borrowing costs, the ECB may have done enough to stop Europe’s fragile economy from sliding further.
Most ECB watchers believe the measures, dubbed ‘QE-light’ by some, is all that can be expected from Frankfurt - at least for now.
“If the ECB is correct and its forecasts are correct, then that’s probably it,” said Reinhard Cluse, an economist with UBS.
“If we see mid next year, however, that the growth and inflation outlook is discouraging, then the ECB will need to go back to the drawing board.”
For now, Mario Draghi’s gambit has put the ball firmly back in the court of governments, notably France and Italy, to do their bit to heal the economy by cutting taxes or changing labour law to make their workforces more nimble.
As the euro zone’s economic crisis has faded in memory after the ECB’s Italian president promised to do whatever was needed to shield the bloc, the willingness of Europe’s politicians to reform has waned, much to the frustration of Frankfurt.
“This is the ECB telling European leaders: ‘we are at the end of the road, now you have to deliver’,” said Jacob Kirkegaard of Washington think tank the Peterson Institute.
Draghi’s action also postpones a divisive debate about launching an all-out programme to buy government bonds or ‘quantitative easing’, a step that would be bitterly opposed by Germany and influential Bundesbank President Jens Weidmann.
At the very least, ECB policymakers will want to wait for a considerable period to gauge the cumulative effect of rates near zero, cheap long-term loans for banks and purchases of securitised debt before embarking on a further course of action.
A Reuters polls of economists produced a consensus that the ECB would buy 400 billion euros of asset-backed securities (ABS) and covered bonds over two years while banks will take up 275 billion euros of cheap loans, which will be enough to drive up inflation and get growth going.
As such, while markets have fixated on the prospects for full QE, Draghi may have produced a similar effect by slightly different means ... and got it through the ECB Governing Council.
While Weidmann was unhappy about Draghi’s commitment this week to buy ABS and other repackaged debt, it is an easier pill to swallow than taking over the bonds of struggling states such as Portugal or Spain.
As a nod to Weidmann, Draghi signalled that the ECB had little else it could do to lift the economy, having reached what he described as the ‘lower bound’ on interest rates.
Germany has long pushed for economic reforms in neighbouring France. Italy too, with its heavy debts, requires change. But criticism is not directed purely at weaker members of the 18-country bloc.
Many in the ECB and elsewhere also want Germany, which has sought to lead by example in the debate about budget austerity, to spend more at home.
While Draghi denied the existence of any ‘bargain’ to make the cost of borrowing cheaper in return for government reforms, many in Brussels believe this to be the unwritten quid pro quo.
“There is a growing feeling in Brussels that we are moving towards a tacit understanding where you give a bit more structural reform and get a bit more monetary accommodation,” said one EU official who asked not to be named.
Moving towards full-scale quantitative easing would not only face political obstacles. There is a growing number of doubters within the ECB, who question the wisdom of buying government bonds when borrowing costs are already so low.
For now, the ECB will wait to see whether a range of schemes to lift the economy will work.
In September and again in December, it will offer banks four-year loans to encourage them to lend to companies and others, which will likely generate hundreds of billions of euros of fresh credit.
A separate project to buy asset backed securities, including repackaged property debt including covered bonds, could gather a further 500 billion euros of loans, freeing banks to lend anew.
These schemes, which come as record low interest rates filter through to consumers and homeowners, will take many months to show results.
There are many who believe that more radical action will be needed eventually.
Francesco Papadia, a former ECB official who helped guide the central bank’s management of the financial crisis, points to Draghi’s decision to push ahead with Thursday’s package despite only securing what he called a “comfortable majority”.
“While QE may not be imminent, the fact that the ECB is more worried about the economy and the fact that Draghi was ‘comfortable’ to take a decision without unanimous support, shows that ... the ECB is willing to act further,” he said.
Joerg Kraemer, chief economist with Germany’s Commerzbank, said the ECB’s economic forecasts were still too rosy and that further action would be needed when they were pared back.
“You can call this QE light. This is the starter but the main course has yet to come,” he said.
Additional reporting by Andreas Framke, editing by Mike Peacock