Europe saved by Draghi and Tsipras?
The balance sheet of one of the many "crucial weeks" for Europe closes with two novelties: the program of "quantitative expansion" (or QE) decided in Frankfurt, and the formation of the Tsipras government, emerging from the Greek polls, with Yanis Varoufakis finance minister. In my opinion, these are two good pieces of news, which could favor the search for new solutions to the deep European crisis.
The real news of the ECB
There has been much discussion in recent days about the size and duration of the purchases of securities (public and private) and about who will bear the risk of holding those securities. But the real news is that starting from the month of March the purchase of bonds issued by member states of the Eurozone becomes, for the first time, an instrument of monetary policy.
SMP, OMT and QE
It is known that the ECB is a singular central bank, which cannot carry out the traditional "open market operations" with central government bonds for the simple reason that there is no central government. However, it has always complied with the practice of other central banks by refraining from buying local government bonds (likewise the Fed does not trade on state and municipal bonds). There have so far been only two exceptions: the Securities Market Program (2010-2012) which envisaged limited, temporary and non-transparent purchases of government bonds, and the Outright Monetary Transactions (OMT), exceptional purchases of securities of individual countries, conditioned to a financial assistance program, and never activated.
Open market operations on European securities
This time, the “sovereign QE” ofasset purchase program introduces an instrument that corrects a structural limitation of European economic policy. The ECB will be able to use it in the future also in forms other than QE. A signal could be the fact that, unlike SMP and OMT, this time Draghi has not felt the need to underline that these are "unconventional operations". A novelty in the novelty is the inclusion of the debt of European institutions (such as the European Investment Bank or the European Stability Mechanism) in the QE operations, thus laying the foundations for future open market operations on 'core' securities and no longer 'locals'.
The monetary policy transmission belt remains weak
As for the impact on growth and employment, it is advisable to be cautious. The ECB statement, aimed at the objective of bringing inflation back to 2%, indicates two transmission channels: 1) lower credit rates should support greater spending on consumption and investments financed by a growth in private debt; and 2) the liquidity that the banks will collect from the operation can be used to purchase other assets and expand credit. On the second, it is difficult to follow the logic. Bank lending will grow as businesses see opportunities for a recovery in demand. And even before QE, nothing prevented the single bank that wanted to make more loans from doing so. It is certainly not the availability of more reserves (on which, moreover, the banks will have to pay 0,20% interest) that makes the difference.
Fiscal restriction will continue to hurt Europe
There is not much to expect from corporate turnover as long as fiscal policies remain restrictive (see Let's save Europe from austerity, Life and Thought, 2014). The reduction in interest rates may have some positive effects, which will however be neutralized by the all-time low in returns on financial capital and pension funds (which, for example, is throwing the German pension system into crisis). A level of yields close to, if not below, zero is another factor in containing demand. Nor does Draghi's silence in the press conference regarding the fiscal instrument, which in recent months he had instead included in his recipe for Europe, bode well. The risk is that the German consent to the Frankfurt operation could bring with it fewer concessions on the front of budgetary policies. Some limited positive effects could come from the possibility that national fiscal policies succeed in the difficult operation of transforming the lower interest expenditure into stimuli for the economy.
The change
If the Eurozone is unable to generate domestic demand, a weaker euro can create foreign demand. But caution is a must. QE has no definite effects on the dollar exchange rate. And European deflation and the Eurozone's current account surplus push in the opposite direction, if anything. But even if the euro remains weak, it is reasonable to expect more support to demand in Germany than, for example, in Greece, aggravating regional imbalances. And if US growth slows down, we still risk finding ourselves back to square one.
Tsipras, Varoufakis and the Greek debt
The new Greek finance minister is the author of a proposal, written with Stuart Holland and James K. Galbraith that has been circulating in the academic environment for several years. It does not have as its objective the rescue of Greece but that of Europe. Varoufakis therefore appears on the European table with a design already discussed in various forums (for example INET), and with the advantage of more favorable constraints than those hypothesized in the original proposal (thanks to QE). And looking for allies (Italy?). Moderate optimism on the financial strength of the euro, therefore, but much remains to be done to see the number of unemployed in the Eurozone fall (more than 18 million).
