…and to too great an extent, what the Fed is doing….
As Spiegel Online International reports, the ECB intends to attempt to buy up southern Europe’s sovereign debt instruments on an enormous scale. The idea is to get those, I’ll call them, toxic assets off the market so that lending can resume and the euro zone’s (and EU’s) market economies can restart.
There are a couple of fundamental problems with this scheme (and I use that term in the American sense). I’ll elide, in this post, the clumsiness of it: it doesn’t satisfy central bank statutes, and the ECB risks becoming a secondary government while simultaneously losing its independence to national politicians.
One problem is the enormous risk this entails—not just for the ECB, but for the EU member nations that fund the ECB and so are on the hook for its failures. That is to say, the taxpaying citizens of those nations are on the hook. The risk is whether the bailed out nations will benefit and recover their economies. If they do not, the losses will become astronomic: the Spanish and Italian debts alone sum to nearly €3 trillion.
Another problem is that this sort of scheme, even if carried out without those…inefficiencies…does not work. For instance, the euro zone finance ministers, in their latest bailout round, approved a €100 billion to rescue the Spanish banks. However, the benefits only lasted until those €100 billion ran out; then yields—the prices borrowers must pay in order to get others to lend—on Spanish and Italian government bonds went back up to dangerous levels.
Some understand this: Jürgen Stark, a former member of the ECB Executive Board, has already said
The ECB has a clear mandate to guarantee price stability. Every additional responsibility compromises this core function.
Notice that: the purpose of the ECB—of any central bank—is to maintain price stability. The legitimate purpose doesn’t even include maintaining full employment, as the Fed attempts to do. (In a free market, unfettered by government interferences beyond such niceties as enforcing contract law and laws against things like lying or cheating, price stability combined with freedom in the market tend to maintain full employment through market forces.)
Price stability—monetary policy—for the EU, and for the euro zone in particular, is the über-framework, within which the various nations can structure their individual market economies as they see fit: against a backdrop of price stability.
Interferingintervening in the markets—monetary policy—is the job of elected governments, not that of central banks.
The ECB needs to stay out of the market for sovereign debt.