In the current, idealized model of central banking, the primary goals of a central bank are usually one or both of maintaining a slightly positive rate of domestic inflation (say, 2% +/- 0.5% per annum) and promoting “full employment” (whatever that means in the real world!) And central bankers are supposed to be rational individuals who exude competence and calm.
Of course, as recent events in Switzerland, Russia, Canada and elsewhere have shown, the reality is somewhat more messy, confusing and unexpected. To be fair, central banks do not and cannot operate in a political “vacuum”, even if they are nominally or legislatively independent of external control or influence; yet, periodically, they demonstrate that those who do not consider their motivations, or ignore the context in which they operate (including such supposedly mundane matters as ownership and governance) do so at their peril.
As events this week surrounding the decision of the European Central Bank (ECB) on implementing a Eurozone Quantitative Easing (QE) programme have shown, context matters. The European Court of Justice’s (ECJ), Advocate-General had issued a preliminary opinion beforehand that gave some “treaty cover” to the ECB’s actions, but the ECB faced a prolonged and unusually public dissent from its 2 Bundesbank board members on the appropriateness, purpose and legality of QE in principle; and most of Germany’s political class either has concerns about the consequences of QE, or is overtly hostile.
Naturally, because even central bankers are human, this affects behaviour and actions. This is visible in how the ECB is choosing to implement QE, as announced on January 22nd . On the one hand, its has indicated that it will purchase assets, including sovereign bonds, at a rate of up to EUR 60BN per month until “at least” September 2016; on the other its has weakened an underlying principle of a currency union of the mutualization of losses, by declaring that, in effect, 80% of the risks will be borne by the 19 individual central banks which now form the EuroSystem. A “fudge” has also been applied to enable the purchase of obligations issued by very weak entities such as Greece, adding some “spice” to the consequences of the Greek elections, but also hedging its bets by deferring the start of such purchases until well after the outcome of those elections.
All this ECB action is with the stated goal of anchoring medium- to long-term inflationary expectations at levels that will reduce the risk of deflation; but, by its actions, the ECB has, in reality, not only created another baroque confection; but also given Eurozone governments yet another opportunity to avoid undertaking the necessary and difficult structural reforms that their economies desperately need to reduce unemployment and stimulate demand.
Thus, the Awbury view is that, while we sympathize with the ECB’s dilemma, and are loth to criticize it for at least attempting to avoid Euro-sclerosis, nevertheless we doubt that it will have the desired effects and will thus help prolong the underlying problems. Of course, while we shall continue to pay close attention to assessing and monitoring the risks and consequences of the ECB’s actions, in the midst of doubt and uncertainty lies opportunity for those willing to be dispassionate and apolitical in calculating risk vs. reward.
-The Awbury Team