This article is from the international herald tribune, from Anatole Kaletsky. It seems interesting to me because it helps me to understand the intimate mechanisms of quantitative easing and also the concept of negative interest rates.
Anatole Kaletsky is an journalist but also an economic analyst.
At last, the European Central Bank seems ready to shoot some adrenalin into the moribund euro zone economy.
After a news conference last week, when Mario Draghi strongly hinted at action to come after the E.C.B. council meeting in June 5, this week brought a host of interviews and media leaks describing quite specifically the new ideas the bank has in mind.
The measure, which is almost a foregone conclusion, will be a cut in the interest rate the E.C.B. pays on bank deposits from zero to negative 0.1 percent or 0.2 percent. Beyond that, E.C.B. officials have suggested several additional stimulus measures : extension of loans to commercial banks at very low fixed rates for three or even five years, purchases by the E.C.B. of bank loans to small and midsize enterprises packaged into asset-backed securities, and concessional lending to European banks on condition that they pass on these funds to those businesses. These announcements generated quite a lot of enthusiasm : The euro weakened from almost $1.40 to $1.37, bond yields in Italy and Spain fell to record lows and European stock markets jumped between 1 and 2 percent. On Wednesday the market reaction even crossed the Altlantic, with interest rates on United States Treasury bonds falling to their lowest levels in six months.
Sadly, however, investors may be overexcited about E.C.B.’s plans. Even assuming all the reports about the plans turn out to be true – and several times recently the E.C.B. has not followed through on similar rumors – it is far from clear that these policies would have much impact on the big economic problems facing the euro zone : feeble economic growth and mass unemployment, a continuing credit crunch for small and midsize enterprises in southern Europe, huge imbalances in competitiveness between Germany and the rest of the euro zone, and deflationary pressures that create debt traps and balance sheet recessions in the peripheral economies.
A negative interest rate on deposits, the measure that has been watched closely, is unlikely to have much effect for two reasons.
First, the banks that have excess cash to park at the E.C.B. are by definition the stronger ones, most of them in Germany, France and northern European countries. These banks do not need further incentives to lend to their customers, because credit is readily available to both businesses and households in those countries.
The credit crunch that needs to relieved is in Italy, Spain and other peripheral countries – and the bnks in these economies are generally much weaker. Their reluctance to lend to customers is mainly due to their lack of capital, not their eagerness to hoard cash at the E.C.B. If negative E.C.B. deposit rates now eliminate the meager profits these institutions can earn by placing excess liquidity in the interbank market, their capital positions may, on balance, deteriorate, and it is hard to see how this would increase their ability to lend.
Second, although negative interest rates may grad media headlines, there is nothing magical about their economic effect. This has been demonstrated by the experience in Denmark, Sweden and Switzerland, where negative interest rates have been used to discourage excessive capital inflows and to try to weaken currencies that were deemed too strong. In all these cases, the effects of imposing what amounts to a small tax on bank deposits turned out to be quite modest.
To achieve the desired results, negative rates had to be supplemented with other measures, like foreign exchange intervention or aggressive expansion of the central balance sheets, which amounted in one day or another to “printing money” and using it to by government bonds.
And printing money to buy government bonds, in the manner of American, British and Japanese quantitative easing, is the one kind of measure still ruled out for Europe by German opposition, as Jens Weidmann, the Bundesbank president, confirmed this week.
To be more precise, Mr. Weidmann has ruled out easing in Europe unless and until the other measures now planned for the E.C.B. have been tried and found wanting. The problem with the step-by-step approach favored by the E.C.B. under pressure from the Bundesbank is that every step taken becomes an excuse for delaying the next step. Experience suggests that E.C.B. economists may be well spend months analyzing and studying the consequences of negative deposit rates before they decide to move onto other measures such as purchasing small and midsize enterprise loans.
And even if the E.C.B. does move faster than than in the past and announces a package next month combining both negative interest rates and business loans, this may not do much for southern Europe without action to encourage investment and spending by businesses and consumers, as well as increasing the availability of credit by easing the regulatory pressure on undercapitalized banks.
What would really help these countries would be a relaxation of fiscal policies or a direct injection of government-backed mortgages that transformed the British economy.
Unfortunately, neither fiscal easing nor any kind of government-backed credit expansion seems to be an option for southern Europe, because it would directly conflict with the deficit-reduction programs and bank restructuring regimes imposed by the European Commission and E.C.B.
The upshot is that E.C.B. action will probably prove just sufficient to prevent the euro zone economy from deteriorating any further, and the attainment of this stability will be offered as a reason not to do anything more ambitious, either by way of monetary stimulus or the easing of fiscal and regulatory constraints. A continuation of Japanese-style stagnation thus seems the most likely prospect for most of Europe despite, or perhaps because of, the half-hearted action that can now be expected from the E.C.B.