It could very well be, according to David Owen, the chief European Financial Economist at Jefferies.
He says the nuclear option – printing money to buy sovereign debt – would help the eurozone in the looming age of austerity.
When the ECB was only faced with a banking crisis, the ECB had the preferred solution, maintaining liquidity in the banking sector, with no obvious exit problems (unlike the US and to a lesser extent the UK). But, now the problem has spread to government finance, with the potential to further undermine banks, the issue becomes more difficult. QE might be resisted, but arguably is the lesser of two evils.
At present, there is no traction in loan growth in bank lending inside the Eurosystem. Yes, lending to households has picked up, but it is still very weak and importantly, lending to the non-financial corporate sector continues to decline. As the BoE found QE doesn’t necessarily mean an increase in the banking sector’s balance sheet; far from it. Underfunding in the UK helped avoid a potentially costly unwinding in the banks’ balance sheet. The danger for the Eurosystem at present is we now see a disorderly shrinkage in bank balance sheets in some countries, worsening downturns.
Moreover, as we continue to argue, to help with all the adjustment that is going to be necessary in the next three years (we are talking about a multi-year tightening in fiscal policy in many countries, not just Greece) would first, be a higher inflation rate and second, a much weaker euro. QE might help on both counts as well. As of March, capital and reserves at the ECB stood at just over €76.4bn. But, there is in theory no reason why the ECB could not expand its balance sheet in the same manner of say the UK, by buying govies. Moreover, it has a wide-ranging mandate to make asset purchases and has proved itself a lot more pragmatic over the years than is often suggested.
Time for thermo nuclear warfare then? Over to you, Mr Trichet.
Related link:
Market swill II – FT Alphaville