Dan White: Mario's last ditch ECB effort may be too little, too late

ECB president Mario Draghi

Dan White

Mario Draghi's plan for the ECB to purchase more than €1 trillion of bonds over the next 18 months is a desperate last-ditch effort to stop the Eurozone slipping into a deflationary spiral.

Alas, it may prove to be too little, too late.

The ECB yesterday announced its plans for quantitative easing - where the ECB essentially creates money out of thin air and uses it to purchase the bonds of Eurozone governments and companies.

About time too. With the latest Eurostat figures showing that prices had fallen by 0.2pc in the year to December 2014, the Eurozone is on the brink of a deflationary spiral where prices keep on falling, no matter what politicians and central bankers do.

But would deflation or falling prices necessarily be a bad thing? Haven't generations of finance ministers and central bankers lectured us on the supposed evils of inflation?

Well it now turns out that falling prices are even worse than rising prices. If prices keep on falling then consumers will put off buying goods and services for as long as possible.

Why buy something today if you can buy it for less tomorrow? The result is an economic slump that can drag on for decades.

Anyone who thinks permanently falling prices are a good thing should look at Japan. It got stuck in a deflationary slump, from which it is only now emerging, for more than 20 years after the bubble economy burst in the early 1990s.


In fairness to ECB president Mario Draghi (left), he is only too aware of the dangers of deflation.

Ever since he took over as ECB boss more than three years ago he has been seeking to follow the example of both the Federal Reserve in the US and the Bank of England in the UK and inject money into the economy through bond purchases.

Unfortunately, Mr Draghi has been fought every inch of the way in his plans for ECB quantitative easing by the Germans.

Incredible though it seems, at a time of falling prices, the German representatives on the ECB's governing council are more concerned about the non-existent risk of inflation.

While yesterday's announcement represents considerable progress, the ECB's plans for quantitative easing are seriously flawed.

In order to overcome German objections, only 20pc of the €60bn monthly bond purchases will be undertaken by the ECB as a whole, with national central banks doing the rest.

The worry must be that, if an individual Eurozone member country got into difficulties, bond purchases by national central banks could make things worse rather than better.

In reality, I suspect that this danger is more apparent than real.

It would be very difficult, perhaps even impossible, for the ECB and the other national central banks to stand by and do nothing if a Eurozone central bank got into trouble through implementing a policy that had been agreed by all.

Far more real is the worry that the ECB has left it too late for quantitative easing to do much good.

While it worked in both the US and the UK, both countries' central banks resorted to aggressive bond-buying soon after the "Great Recession" first struck in 2008.

Through a combination of quantitative easing and interest rate cuts, the Fed and the Bank of England were able to nurse their economies back to respectable levels of growth.


Unfortunately, having already cut Eurozone interest rates to just 0.05pc, the ECB may have left it too late for quantitative easing.

With official ECB interest rates now as near zero as makes no difference, the Eurozone has only one shot left in its locker.

Mario Draghi must hope that ECB bond buying will be sufficient to do in the Eurozone what it took a combination of bond buying and rate cuts to do in Britain and the United States.

Could we be looking at a self-fulfilling prophecy as the Germans point to their failure to kick-start Eurozone economic growth, as an excuse to prematurely pull the plug on ECB quantitative easing?

Even if things don't get quite so bad the risk must be that - even if they don't do any harm - by having been delayed for so long ECB bond purchases won't do much good either.