At an event organized by the German economic daily Handelsblatt on Wednesday, Deutsche Bank’s (DB) CEO John Cryan made an economic argument against the European Central Bank’s (ECB) quantitative easing policy. Cryan called on the ECB’s Board on Thursday to signal the beginning of the end of the era of cheap money,
For ECB’s President Mario Draghi it would be politically daring to fully take on board or ignore the argument.
Cryan warns that cheap liquidity in Europe and the United States is triggering asset bubbles in stocks, bonds, and property. Currently, the ECB buys €60bn a month in government and corporate bonds. However, markets do not expect anything more than a deceleration of the programme on Thursday for three reasons.
First, it is true that the ECB is reaching the limits of its own pledge not to buy more than 33% of the sovereign debt issued by any EU member state. As scheduled, that limit will be reached in the summer of 2018 for Germany and by December 2018 for France, Italy, and Spain.
Secondly, with German and Italian elections looming, the ECB will not want to be seen as making politically significant policy choices.
Keeping the programme as it is, would benefit Italy. It is no accident that the German Federal Central Bank (Bundesbank) estimated in July that Italy is the biggest beneficiary of the ECB’s quantitative easing programme, followed by the Netherlands and Belgium. Move more boldly would benefit Germany, that is, Europe’s biggest creditor nation. Moving more boldly to raise interest rate would benefit Germany, that is, Europe’s biggest creditor nation.
Thirdly, despite a strong rebound in the Eurozone’s labour market, the ECB is nowhere near its 2% inflation target in the Eurozone. In fact, inflation is again falling due to a surge of the Euro’s exchange rate against the pound and the US dollar.