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Today the European Central Bank
did what financial markets had expected, after lots of leaking of the policy
moves. They announced they would buy securities in the asset markets, at a rate
a little higher than had been expected of €60 billion per month, from March
2015. The policy will continue until inflation looks like getting closer to 2%,
which, with the slump in energy prices, will be a while yet. In all likelihood,
this extra asset buying (there has been some before) will amount to a bit over
€1 trillion and last until September 2016, maybe longer. For comparison's sake,
the new policy is around 10% of euro area GDP, compared to the US and UK
policies of 'quantitative easing' that have amounted to more than 20% of GDP.
This policy move is the latest
in a series that indicate there is no way out of the crisis. How can anyone
believe that this policy, essentially making government bonds have even lower
yields, can do anything for the economy when 10-year government borrowing costs
were already less than 1% in Germany and France and less than 2% in
Italy and Spain, the euro area's biggest economies?
The central bank's notion is
that this will feed into private sector borrowing costs being lower, but there
are some difficulties here. One is that there is very little demand to borrow
to invest, given the dire economic outlook; the other is that banks would not
to lend at anything like the sub-1% or 2% numbers to private investors, and the
level of interest rates is not the problem. The problem is that there is no
profitable avenue for large-scale capital investment, or any investment that
does not depend upon government subsidy, tax dodging or some form of financial
trickery. Even the countries that claim they have done better than the euro
average - especially the US, but also the UK and Switzerland - are now faced
with higher currency values against the ones that are under the market's cosh. Last week, the Swiss National Bank's made a dramatic move to abandon its 3-year attempt to stabilise its currency against the euro. This was done largely in anticipation of this week's action by the ECB and so far the euro's value has fallen 18% against the Swiss franc. Unsurprisingly, the euro fell another 1-2% today.
The ECB made a concession to
German worries about the new policy. They said that 80% of the risk of the new
purchases would be borne by national central banks, because central banks in the euro area might
buy rubbish and face a loss. In its
press releases today, they did not explain who would buy what, or how much.
Because the scale of the buying, if it is not directed, would evidently be
concentrated on the better risks - Germany, especially - a proviso was
included: only up to one-third of a country's outstanding debt could be bought
in this way, and the debt had to have a maturity of 2-30 years. Germany has
around €1.1 trillion of debt outstanding, with less than this in the 2-30
maturity range. So these, the 'safest assets', will not be able to use up more
than about a third of the new programme. German government securities out to a
maturity of 5 years also have a yield that is zero or negative. So, presumably,
this is good news for the government securities of France, Italy and Spain, the
other countries with large bond markets.
The ECB's hope is that the lower
yields will force investors to take on more economy-boosting risks. Instead,
the likelihood is that there will be a continued reliance by capitalists on
'making money' through financial investment, something that further stretches
the gap between value creation and financial accounting. On occasion, that gap is
narrowed by a slump of financial market prices for bonds and/or equities, but
the ECB has signalled that it will gamble for a while longer on trying to push
the gap still wider.
Tony Norfield, 22 January 2015
