The European Central Bank must not print money. Printing money is inflationary, evokes episodes of hyperinflation in the past which makes it repellent to the people of Germany. It would be tantamount to economic disaster.
All familiar points – we’ve heard them from Angela Merkel countless times in recent weeks, and you can hear one of her colleagues, CDU politician Michael Fuchs on Radio 4 the other day repeat them over and over again.
So I suppose it might surprise you if I were to tell you that, by most definitions of the word, the ECB is already printing money.
Now, “printing money” is a loose term used (and often misused) to apply to a number of unfamiliar economic techniques, so let’s be specific. We’re not talking, here, about what happened in Weimar Germany or relatively recent Zimbabwe: a central bank 1. buying government debt at the direct behest of the Treasury because no-one else wants to buy it and 2. physically printing vast amounts of banknotes. Neither 1 nor 2 are being done by any of the major central banks today, including the Bank of England, Federal Reserve or ECB.
What the BoE and Fed are doing, however, is electronically creating money in order to buy their governments’ debt – independently rather than under Treasury orders. So let’s agree this is what we mean by “printing money” (or, if you insist, “quantitative easing”).
That cash, once in private banks’ reserve accounts, should theoretically encourage them to lend – so a good measure of whether a country is indulging in QE is whether its banking system is suddenly flush with banks reserves.
The ECB adamantly denies it is heading down this road. Yes, it concedes that under its Securities Markets Programme (SMP) it is indeed buying up the government bonds of troubled euro countries. That’s how it’s been keeping Italian and Spanish bond yields under at least some control. It’s spent almost €200bn this way, in fact. However, and here’s the key thing, it says it is sterilising these purchases (you can hear Fuchs pull this rabbit out of the hat in the Today interview linked to above).
Sterilising simply means after having created money to buy your favoured bonds, you then go back into the market to mop up all that extra cash, usually by selling an amount of bonds or instruments equal to the cash you’re creating.
The mechanism of how this works is less important than the notion that you’re negating the effect of that extra cash you’d otherwise be creating. The upshot should be that your bond-buying doesn’t increase the cash sitting in banks’ reserves. The BoE and Fed are adamantly not sterilising their operations right now – after all increasing the cash in banks’ reserves is precisely their objective.
The ECB’s alibi, on the other hand, is that it is sterilising all those nasty (electronically) printed euros it’s used to buy dodgy Italian/Spanish debt. True as this may be, it is a smokescreen. For the instruments it’s selling into the market as part of its sterilisation are so liquid, short term (they’re one-week bills) and privileged (they can be deposited as collateral with the ECB, unlike most other securities) that so far as most economists (and banks) are concerned, they are essentially as good as cash.
It’s rather like mopping up a wet floor with a mop that’s already sodden with water.
As far as Professor John Whittaker of Lancaster University is concerned, this is quantitative easing in all but name. And I’ve heard similar sentiments echoed by a number of senior contacts around the central banking world.
Just check out this chart (courtesy of Simon Ward of Henderson Global Investors), which shows how banks’ reserves have increased in, respectively, the UK, US and euro area.
Recall that as central banks carry out quantitative easing (“printing money” etc), the direct upshot is to increase the amount of money sitting in the reserve accounts of banks in their jurisdiction. Note how that’s clearly happened in the UK and US, and then check out the red dotted line, which is euro bank reserves plus those uber-liquid one-week notes.
So based on one of the key metrics for so-called money-printing, the ECB is already where the Federal Reserve was after its first bout of quantitative easing, and is heading further into unknown territory.
So the next time you hear someone from Germany or Brussels insisting that the European Central Bank is not printing money or indulging in QE, remember: it’s little more than a smokescreen.