Friday 23 March 2018

Comment: QE case can only shut the door on an empty stable

The headquarters of the European Central Bank (ECB) in Frankfurt
The headquarters of the European Central Bank (ECB) in Frankfurt
Donal O'Donovan

Donal O'Donovan

Markets shrugged off the question mark thrown by a German court over the legality of the ECB's core economic policy yesterday.

Despite the ruling no-one expects quantitative easing (QE), which currently involves spending €60bn a month, to be put on ice while the case goes to the European courts. Indeed, by the time the European Court of Justice comes back with a definitive ruling the current QE programme is likely to be over or very close to being wound down.

Market watchers don't even believe that an adverse ruling from the ECJ would force a reversal of QE. If such a thing were possible, the forced sale of more than €2 trillion of assets is the kind of event that would throw the global economy into a tailspin and send us all back to the start of the lost decade. So, if the QE critics win, the best they'll achieve is shutting the stable door after the horse has bolted -or from Mario Draghi's view after the horse has been led out and run a successful race.

Since QE was launched in 2015 the eurozone has revived, pumped up on the resulting cheap credit which has mainly flowed to big business, banks and countries - but gradually too to SMEs and households. Not for the first time, the ECB tested the limits of its legal authority to achieve that, a dangerous habit that will have to be reigned in eventually. If it comes, a legal slapdown from the ECJ on QE may force Frankfurt to act more conspicuously inside the bounds of its mandate.

Having powerful institutions bound by the rule of law is a good thing. However, it would also constrain the bank's ability to respond on the hoof to any future crisis.

Irish Independent

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