After a breathless year of action and now a new political crisis in Greece, the European Central Bank (ECB) might finally roll out its heavy artillery next year in its battle against deflation, analysts said.
Bank watchers said that new elections due next month in debt-mired Greece could prove unsettling for European partners, but should remain manageable for the eurozone as a whole.
This means that the central bank’s overriding challenge in the new year is likely to continue to be preventing the single currency area from sliding into deflation.
“I see a broad consensus around the table in the governing council that we need to do more,” bank executive board member Benoit Coeure said recently.
So far, the bank has rolled out a wide range of measures to try to get eurozone inflation back up to the level of 2 percent that it regards as economically healthy. It has cut its interest rates to new all-time lows, made unprecedented amounts of cheap loans available to banks via its Long-Term Refinancing Operation and Targeted Longer-Term Refinancing Operation programs, and embarked on asset purchase programs — asset-backed securities and covered bonds — to pump liquidity into the financial system.
However, at 0.3 percent, area-wide inflation is still alarmingly low and could fall even further as a result of falling oil prices, so the bank is examining the possibility of quantitative easing.
This is the large-scale purchase of sovereign debt, a policy pursued by other central banks to boost their moribund economies, but avoided by the eurozone.
Most observers believe the only question about such a program is in its scheduling, which could be as early as Jan. 22 or a bank governing council meeting on March 5.
Germany’s Bundesbank president Jens Weidmann is an outspoken opponent of easing, which he said would take the ECB way out of its current legal remit.
In a newspaper interview over the weekend, Weidmann spoke against seeing quantitative easing as a panacea for the eurozone’s ills.
“Disappointment is inevitable, and the real nature of the problems risks getting lost from sight,” he told the Frankfurter Allgemeine Sonntagszeitung.
German Minister of Finance Wolfgang Schaeuble agreed, saying: “Cheap money should not be allowed to dent the reform zeal in some countries. There is no alternative to structural reforms — if things are going to improve again.”
However, central bank president Mario Draghi said this month that “we do not need unanimity” on the council and a program of easing could be designed in such a way to win consensus.
Frankfurt-based Commerzbank AG economist Michael Schubert said Draghi and his supporters would face challenges in persuading the council to support easing.
Nevertheless, some analysts think that while large-scale bond purchases might have worked for the US and UK, the economic and legal setup in the eurozone meant that easing would not be the cure-all that many hope it will be.
“It is important to note that the sovereign bond purchase program as a standalone is unlikely to have the dimensions of the US, British or let alone Japanese programs,” Hamburg-based Berenberg Bank economist Christian Schulz said.
UniCredit economist Erik Nielsen said that too much was being expected of the ECB, which has repeatedly taken on the role of firefighter in the long years of the eurozone crisis, while politicians have been reluctant to push through tough, but unpopular structural measures.
The new crisis in Greece, where a radical anti-austerity party looks set to win snap elections and possibly undo many economic reforms, would likely remain manageable for the eurozone as a whole, analysts said.
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