WSJ: Mario Draghi’s Best Shot
Monetary policy isn’t the reason for Europe’s slow economic growth.
March 10, 2016
Christmas came late for markets on Thursday, as European Central Bank President Mario Draghi delivered the monetary jolt investors had wanted in December. Already those investors are refusing to take yes for an answer.
Mr. Draghi threw the kitchen sink at Europe’s deflation and slow growth, plus the stove and toaster. Monthly asset purchases under the ECB’s bond-buying, or quantitative easing, program will expand to €80 billion ($87.9 billion) from €60 billion, and the bigger surprise is that the ECB will start buying corporate bonds in addition to sovereign debt. The latter step and some technical tweaks to the program are meant as reassurance that the ECB won’t run out of eligible bonds to buy. This will bring the total value of QE to €1.7 trillion or more.
Mr. Draghi also cut the rate the ECB pays banks for their deposits to negative-0.4% from negative-0.3%. This is supposed to encourage banks to lend excess reserves instead of stockpiling cash. And since negative rates strain bank profits, the ECB also expanded lending subsidies, known as TLTROs, that will partly offset what banks pay the ECB to hold deposits. On Planet Negative Rates, central bankers are using taxes and bribes to spur lending.
Mr. Draghi has given markets everything they wanted and more. So the sour reaction to Thursday’s news—European shares closed down on the day, and the euro fell against the dollar—must have come as a shock at ECB headquarters in Frankfurt. It shouldn’t have.
Mr. Draghi is right that the monetary problem Europe ought to worry about is why banks aren’t lending. Some of this is because demand for new loans is slack as businesses worry about slower export growth to China and emerging markets. But the ECB and its enablers also are stuck on the view that banks are carelessly hoarding too much cash in reserves at the central bank. There’s no evidence for that.
European banks continue to be hobbled by long delays in shaping up from the 2008 panic. Italy is still struggling to devise a new plan for clearing bad loans—a process that could take up to a dozen years. Giants like Deutsche Bank are only now reorganizing to boost profitability.
Mr. Draghi and his regulatory peers have aggravated the problem by rolling out stringent new capital requirements that are costly and create significant uncertainty among bank managers and investors. In two papers this month, economists at the Bank for International Settlements highlight the unpredictable interactions among slowing economic growth, new capital rules and negative rates as a cause for recent volatility in bank stocks.
Instead of finding ways to help this beleaguered financial system allocate capital more efficiently, Mr. Draghi is further politicizing credit. Most damaging is the expansion of QE to include purchases of “investment grade euro-denominated bonds issued by non-bank corporations established in the euro area.”
The details weren’t released, but does this mean the ECB will favor, say, a bond issue to fund an expansion at Siemens but not a GE plant in the eurozone? And why favor lending to large companies over medium-size firms? These distortions come on top of the TLTRO lending subsidy that favors some forms of credit (small-business loans, for instance) over others (residential mortgages).
The case for Mr. Draghi is that, with the eurozone so far short of the ECB’s near-2% inflation mandate, the central bank has to do anything it can to preserve its credibility. He also keeps hoping his exertions will give elected leaders the fiscal and political running room to pursue the supply-side reforms Europe desperately needs.
Then again, try telling that to the French masses who this week went on strike against a modest attempt to reform the growth-killing 35-hour work week. Europe has only been able to reform its economies during a crisis, which explains why Spain is now a growth leader, having nearly fallen apart in 2012. But now that modest growth is back, the Spanish are tossing out the reformers. Mr. Draghi is discouraging further reforms by muting the market signals demanding them.
So maybe ungrateful investors are onto something. Mr. Draghi didn’t do enough to save Europe on Thursday because he’ll never be able to. Meantime, the collateral damage from the shots he takes with his monetary bazooka will keep mounting.
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