Monetary policy of the Fed should not be an option for the ECB

Commentary by Michael Menhart

The success of the QE programme of purchasing government securities will only become clear once the US economy has achieved lasting stability. Nor is it yet clear whether this sort of monetary policy leads to dangerous price bubbles. It is therefore too soon to make a final judgement. But what is the right course for Europe? The ECB is already moving towards QE with its recent programmes of buying securities from the private sector. Whether or not taking the process a step further and purchasing government bonds will help get the weak economy back on its feet seems doubtful. There would also be huge risks. If the economy were to deteriorate further due to an external shock, the ECB would have few other cards to play. What is more, the eurozone’s institutional framework simply does not allow measures of this sort. In addition, the ECB’s current role as a “firefighter” – intervening pragmatically, but breaching agreed rules – cannot become permanent, especially if this is seen as a substitute for reforms. The ECB itself is keen to point this out.

Anyone advocating large-scale government bond purchases has to accept the fact that joint liability must also be accompanied by joint control. In effect, this means political union – in other words, greater integration and surrendering national sovereignty. Such a move would currently find little support, either among the general public or in Brussels. Nor is there a majority in favour of the opposite position – rejecting joint liability and calling for a return to strict Maastricht criteria – especially in the crisis countries. Even Germany, with or without Maastricht, and although currently approaching a balanced budget, can be expected to adopt a more flexible stance again if the economic situation requires it. Since there is currently no political majority in favour of either of these two positions, the current approach of “muddling through” is likely to continue. As a last resort, the ECB will defend the euro by every means in its power. However, politicians must recognise that the tools available to the ECB are not sufficient on their own to solve the myriad problems facing the eurozone. Structural reforms, along with further moves towards political integration, are unavoidable. If investments in, say, infrastructure are currently being discussed as a way of overcoming the current economic malaise, this is progress of a sort, if only because discussions about fiscal policy enjoy greater democratic legitimacy than reliance on an all-powerful central bank.