Article published by José Alberto León Alonso in El Día on 02/02/15.
The European Central Bank (ECB) has decided to begin in March the purchase of sovereign bonds of the euro zone for eighteen months and for an amount of 60,000 million euros per month. Specifically, it will buy European government bonds with maturities between 2 and 30 years, encouraging a reduction in long-term yields. This would have to translate into lower financing costs that, in theory, would be passed on to the banks and, therefore, again in theory, new credit injected into the economy at a reduced cost. The big goal? Promote greater economic activity and therefore, greater inflation. With this massive flood of cheap money, the ECB seeks to combat the deflationary pressures in the euro zone given that inflation has fully entered the negative zone.
The purchases will be proportional to the GDP of each country in the euro zone, reinforcing the idea that government bond purchases are carried out for monetary policy purposes and not to alleviate the financing needs of specific countries. Conveniently, this feature will benefit Italy, which has the third largest ECB capital share and the largest public debt burden. For Spain it will mean the purchase of 60,000 million euros per year of its public debt.
The big question is whether this measure will have the desired effects on the real economy. My position is that it will have almost no effects on the real economy, neither positive nor negative. It will neither increase economic activity nor generate inflation. On the other hand, it will have them in the financial economy. With this measure, savings in public debt or deposits will barely obtain remuneration and investors will turn to equities to obtain it, so the stock market will rise. Good news for those who own shares today, since their wealth will increase.
Why don't I think it has effects on the real economy? Because of what economic theory says about it. In this case, the Wallace Irrelevance proposition is applied, also known as Wallace Neutrality, which indicates that in an environment of fiscal restriction like the current one, debt purchases in the markets are not effective. When the United States applied it, its commitment to keep interest rates low as long as necessary was more effective than its own policy of purchasing sovereign bonds. On the other hand, households in the euro area have much less equity wealth than US households, so the expected increase in equities will have less impact on consumers than it did in the United States.
Yes, it is going to have some important effects financially. It will increase share prices, reduce long-term interest rates, depreciate the euro and ease credit crises. Countries will be able to borrow at reduced costs, which will allow them to avoid new fiscal adjustments, and those who are mortgaged are assured of at least two more years without increases in interest rates, which will undoubtedly be a relief for them.
Its greatest positive effect will be psychological. On the one hand, with this policy the possibility of speculative attacks against the euro or some of the countries on the European periphery are doomed to failure. I don't even want to think about the impact on the markets of the victory of a radical party like Syriza if this measure had not been in force. It matters little whether Greece and the EU reach an agreement on debt renegotiation or not. The ECB would act as a firewall by purchasing debt from peripheral euro countries and prevent any possible spread of a failure in the negotiations and even an eventual exit of Greece from the euro. It must be remembered that, until an agreement is reached, the purchase of sovereign debt by the ECB does not apply to Greece, so the ECB will not buy Greek bonds for the moment, and the Greeks will continue to depend on the troika. In this sense, the ECB has bought time for Europe to solve its problems and, for Spain, time is essential. If we maintain the current path of growth, no one will doubt our ability to pay our debt and foreigners will continue buying our public debt, essential to maintain our Welfare State without new cuts.
But the ECB's actions also have their negative aspects. It punishes the saver with ridiculous returns and increases the risk of moral danger from European governments. For the former, achieving a minimum return on their savings will be more complicated, so they will be forced to turn to variable income or products with greater risk. As for the latter, strong and sustainable growth requires difficult structural reforms to make markets more flexible and create the conditions for more innovation and greater productivity. For governments, however, the temptation will be strong to rely on ECB bond purchases and a weaker currency, avoiding structural but unpopular reforms to their economy. France and Italy could try to avoid reforms to their ossified economic structure. This would condemn these countries, but also the euro zone, to continue on a path of low growth and high unemployment in the long term. The risk is there, but it will have to be faced.
In any case, 2015 can be faced with some optimism. The main threats to growth this year, such as the unresolved Greek debt crisis, the conflict between Russia and Ukraine and turmoil in the Middle East, are more geopolitical than macroeconomic in nature. The ECB has bought us time to create a path to future prosperity. Whether we achieve it will depend on overcoming political obstacles and continuing to face the changes that make our economy more productive.
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