ECB's quantitative easing

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Question 1:

Do you agree that the design of the ECB's QE programme reduces its effectiveness? 

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Question 2:

Do you agree that the structure of the ECB's QE programme makes the Eurozone more fragile and increases the risk of one country leaving the euro?

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Summary

Will the risk-sharing arrangements within the European Central Bank’s quantitative easing (QE) programme reduce its effectiveness? According to the latest monthly survey of the Centre for Macroeconomics (CFM) reported in this column, our panel of experts are exactly evenly divided. The written responses suggest that this divergence reflects differences in views about the channels through which QE operates.

Introduction

In January 2015, the European Central Bank (ECB) announced a substantial increase in its asset purchase programmes.[1] Under its existing programmes, the ECB had been buying asset-backed securities and covered bonds of around €10bn in total per month. Following the January 2015 announcement, the total assets purchases would increase to €60bn per month between March 2015 and September 2016. The total assets to be bought in this window are €1.1 trillion, 9% of the stock of central and other government debt of Eurozone nations, widely referred to as quantitative easing (QE).[2]

The additional €50bn of asset purchases per month is through the Public Sector Purchase Program (PSPP). This consists of €6bn of debt securities of EU supranational institutions and €44bn of debt securities of sovereign, national agencies and national utilities. These national securities will be bought in proportion to the Eurozone's national central banks' shareholdings of the ECB (in effect, in proportion to the size of national economies).

Risk-sharing in the ECB’s QE

In this CFM Survey, our interest is in the risk-sharing arrangements within the QE programme. The ECB indicated that the credit risk of the €6bn debt of the supranational EU institutions and €4bn of the national debt securities would be shared across the Eurosystem according to shareholdings.[3] The credit risk of the remaining €40bn of national securities would remain with the national central bank of the issuer. This is in contrast to the ECB's earlier Securities Market Programme (SMP) in 2010-12, which involved the acquisition of €220bn public and private debt securities from Greece, Ireland, Italy, Portugal and Spain to be held to maturity. Profits and losses are to be shared across national central banks according to the ECB’s shareholdings rather than the borne by the national central bank of the issuing government.

Effectiveness of QE

According to press reports, the decision to allocate the major fraction of national securities back to national central banks reflects a compromise decision.[4] A number of arguments have been put forward in favour of this approach:

  • First, this is a direct means of coupon payments being kept within national borders.
  • Second, as long as fiscal policy is nation-specific, any credit risk should also stay within borders. If credit risk is perceived as shared across the Eurozone, national governments may be less inclined to implement reforms.
  • Third, as QE increases in size, the ECB may risk its solvency, whereas the national central banks would (potentially) continue to have the fiscal backing of their governments.
  • And fourth, more generally, risk-sharing may have no effect on the efficacy of QE since it has no bearing on the total amount of liquidity (money base) created or where this money will flow.

There are also arguments in favour of greater risk-sharing:

  • First, a rationale for the European Banking Union is to break the link between governments and national banking sectors (the so-called 'doom loop'). Requiring national central banks to hold greater amounts of their sovereigns’ debt may re-establish the link. If the government were to default, this may make the national central bank insolvent and depositors less certain about repayment, possibly leading to capital flight.
  • Second, QE with limited risk-sharing where a government’s solvency is in doubt might increase the cost of market funding relative to a QE programme with more risk-sharing. Giavazzi and Tabellini (2015) point out that if it is recognised that the government cannot default on its bonds to its central bank, then the central bank becomes a senior creditor and private investors become junior creditors. This would increase the cost of market funding in high-risk countries.

Q1: Do you agree that the design of the ECB's QE programme reduces its effectiveness?

Thirty-five of our panel of experts replied to the question. Leaving aside the five who expressed no opinion, or who neither agreed nor disagreed, our respondents were exactly split between those who agreed and those who disagreed with the proposition. Taking account of self-declared expertise, 54% agreed with the proposition.

Those who agreed with the proposition tended to emphasise interest rates as the channel through which QE affects activity. Panicos Demetriades (Leicester) noted that several countries are likely to face higher borrowing costs and David Bell (Stirling) described it as ‘entirely fanciful that the market will ignore the allocation of risk.’

Others were more concerned with signalling. Sir Christopher Pissarides noted that ‘national central banks are to take on the risk but cannot monetise the debt in the event the government cannot pay and cannot affect interest rates. It's an odd situation that might deter private lenders.’ Ethan Ilzetzki (LSE) asked the question ‘if the EU is not willing to bet on its own survival, who should?’ Angus Armstrong (NIESR) went further, suggesting that limited risk-sharing is likely to increase the risk of capital flight, if there is concern about government solvency.

Those who disagreed with the proposition either emphasised the monetary base channel by which QE affects activity, or thought the consequences simply too small to matter. Wouter den Haan (LSE) noted that QE involves adding liquidity to the economy and how risks are shared has no effect on this operation. Similarly, Jagjit Chadha (Kent) said that monetary conditions are determined by the liabilities of the central bank, hence the ‘risk-sharing has little impact on the effectiveness of QE.’ Patrick Minford (Cardiff Business School) described the very notion that credit risk is not shared by the ECB as ‘far-fetched’.

Fragility of the Eurozone

The limited risk-sharing on the €40bn of additional national securities is in contrast to another major monetary union and the ECB's previous actions. In the United States, assets bought under QE are held in the System Open Market Account (SOMA) at the New York Federal Reserve and any losses are shared across the Federal Reserve System. Moreover, while ECB President Mario Draghi has made clear that ‘in Outright Monetary Transactions (OMT) full risk-sharing is fundamental for the effectiveness of that monetary policy measure’, Benink and Huizinga (2015) suggest that subsequent risk-sharing arrangements within QE may embolden those would prefer risks to be contained within national boundaries (the vote for OMT was not unanimous).[5][6]

Q2: Do you agree that the structure of the ECB's QE programme makes the Eurozone more fragile and increases the risk of one country leaving the euro?

Thirty-six of our panel responded to this question. Leaving aside the eight who had either no opinion or neither agreed nor disagreed, the votes were again evenly split between those who agreed and those who disagreed with the proposition.

Those who agreed with the proposition include Ricardo Reis (LSE and Columbia) who noted that if we consider the possibility of a country leaving the Eurozone, reneging on TARGET II and/or ELA balances, then this arrangement encourages a ‘run on their local banks and force an exit.’ Others are concerned about the signal of political commitment. Martin Ellison (Oxford) suggested that QE risk-sharing arrangements do not ‘bode well for the type of risk-sharing reforms that will ultimately be needed to keep the Eurozone together’; and Nicholas Oulton (LSE) noted that the failure of Eurozone countries to agree that ‘we are all in this together’ surely makes the exit of one or more countries more likely.

Those who disagreed with the proposition, tended to emphasise that whatever fragilities exist in the Eurozone, they are not the result of the QE programme. Ray Barrell (Brunel) supported the risk-sharing arrangements as they minimise moral hazard and so prevent higher debt by countries trying to ‘game the system’ by issuing even more debt. Costas Milas (Liverpool) expressed the view that the limited risk-sharing reflects a lack of structural reform, and that it is this lack of reform that undermines growth and creates the fragility. John Driffill (Birkbeck) acknowledged that the QE programme could have been better designed, but said that it does not increase the fragility of the Eurozone. 

 

References

Benink, H and H Huizinga, (2015), ‘The ECB’s bond purchase programmes and the limits of national risk-sharing’, voxeu.org 16 May 2015 (http://www.voxeu.org/article/limits-eurozone-national-risk-sharing)

De Grauwe, P and Yuemei Ji (2015), ‘Quantitative easing in the Eurozone: It's possible without fiscal transfers’, voxeu.org 15 January 2015 (http://www.voxeu.org/article/quantitative-easing-eurozone-its-possible-w...)

Giavazzi, F and G Tabellini (2015), ‘Effective Eurozone QE: Size matters more than risk-sharing’, voxeu.org 17 January 2015 (http://www.voxeu.org/article/effective-eurozone-qe-size-matters-more-ris...)

 

Endnotes

[1] See the ECB’s press release: 'ECB announces expanded asset purchase programme', 22 January 2015. https://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html on 22nd January 2015

[2] The total nominal value of outstanding central government debt was €6,798bn and other general government debt was €608bn. See ECB https://www.ecb.europa.eu/stats/money/securities/debt/html/index.en.html

[3] The credit risk on the supranational bonds is marginal. In the case of the European Investment Bank, the 28 EU members are shareholders and have joint liability. Over 90% of the capital is callable on the member states.

[4] For example, see http://www.bloomberg.com/news/articles/2015-01-22/draghi-commits-ecb-to-trillion-euro-qe-plan-in-deflation-fight

[5] Quoted from the ECB’s ‘Introductory statement to the press conference (with Q&A)’, 22 January 2015. https://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html

[6] The lack of unanimity in the vote for QE is reported in the ECB’s 'Introductory statement to the press conference (with Q&A)’, 6 September 2012.

http://www.ecb.europa.eu/press/pressconf/2012/html/is120906.en.html

 

 

 

 

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How the experts responded

Risk sharing arrangement and QE's effectiviness

Participant Answer Confidence level Comment
Wouter Den Haan London School of Economics Disagree Not confident
QE involves taking government bonds out of the economy in exchange of liquidity. How risk regarding future price changes (and possible future defaults) is shared between countries has no effect on this operation itself and no direct effect on how these two changes make their way through the system. How Eurozone countries share risk (in general) is of course very important for economic developments in the Eurozone. However, the announced limited risk sharing for this round of QE is in line with previous policy actions and cannot have provided new information about the extent to which Eurozone countries are willing to share risk. So how does this matter for the ECB's effectiveness? Unfortunately, we really do not know how additional liquidity in the financial sector and a reduced stock of government bonds in the private sector affects real activity. Unless one thinks that this particular risk sharing arrangement has changed people's opinion on how risk in the Eurozone will be shared in general, it is hard to see how it affects the effect of this round of QE.
David Cobham Heriot Watt University Neither agree nor disagree Not confident
It may or may not, depends on circumstances.
John Driffill Birkbeck College, University of London Disagree Confident
A different design with full mutualization of the risk of default would have been more effective than than the actual one, but it would have raised other problems.
Ethan Ilzetzki London School of Economics Agree Very confident
To answer this question one needs first to consider purpose QE might serve. My view is that QE works because it might reduce longer-term or riskier market interest rates when short-term risk-free interest rates have hit the zero lower bound. In this respect, the purchases of German and French sovereign debt--whose returns have been close to zero throughout the crisis, is trading cash for what is being priced as a perfect substitute. (If anything, the market is signalling that there is a shortage of core-Eurozone bonds.) Thus a large part of the purchases serves no purpose. The risk-sharing agreement itself has two disadvantages. The first, indicated in the question, is that it might reduce the risk premium on periphery Eurozone sovereign debt by less than it otherwise would. This is probably true on the margin, but this would have been priced in to yields by now. With yields of periphery Eurozone sovereign debt around 2%, the market shows no indication of this concern. My greater concern is the signal this sends for the medium-term viability of the Euro. What does it signal to the world when ECB policy is explicitly designed to insure core-Eurozone countries against risks that are only relevant if the Euro collapses? If the EU is not willing to bet on its survival, who should?
Fabien Postel-Vinay University College London No opinion Not confident at all
David Smith Sunday Times Disagree Confident
I think the most important thing was to secure agreement on the expanded QE programme. That, and the confidence effects it has generated, outweighs any negatives from risk-sharing.
Ray Barrell Brunel University London Disagree Confident
Government deficits are constrained by political costs, and if debt is held abroad the costs of default to domestic residents and politicians are lower. Hence any scheme that increases foreign holdings of government debt raises the risk of default. We have just seen this in the case of Greece, where foreign holding dominated the debt stock. A QE programme without a risk sharing agreement that left default liability with the issuing country could be seen as more likely to be gamed by some players and hence could involve higher borrowing costs for everybody. I would judge that the positive effect of constraining excess debt issuing would outweigh the negative (single country) effects of any asymmetries in existing risks. A clear allocation of the default risks reduces default probabilities and hence borrowing costs on average.
Martin Ellison University of Oxford Disagree Confident
The aim of the ECB asset purchase programme is to stimulate economic activity by reducing long-term yields. Evidence from QE programmes in the US and UK suggests that this will indeed happen, primarily because assets of different duration are only imperfect substitutes and investors have a “preferred habitat”. That credit risk is not fully shared, though, is likely to push interest rates up in member countries with tight fiscal positions. However, with the bulk of the risk taken on by countries that do not have stressed fiscal positions, it is reasonable to expect only a marginal reduction in effectiveness of the programme. The change in risk sharing is an undesirable side-effect, but probably insufficient to doubt the efficacy of the medicine.
Ricardo Reis London School of Economics and Columbia University Neither agree nor disagree Not confident
While there is compelling evidence that QE has been effective in the recent crisis at reducing interest rates, the channels through which it operated are still being figured out. There is exciting research on the topic, but still not a definite conclusion. Therefore, concluding whether the particular approach taken by the ECB will improve or hurt that effectiveness is not something that I think we can confidently answer.
Paul De Grauwe London School of Economics Strongly Disagree Extremely confident
Nicholas Oulton London School of Economics Agree Very confident
Would a Greek business be more likely to invest if in effect all Eurozone central banks were buying Greek government debt or if it is only the Greek central bank doing so? The answer to my question must be yes.
Akos Valentinyi University of Manchester Strongly Agree Very confident
Generally monetary conditions are determined by the liabilities side of the central bank. Hence the risk sharing arrangement has little impact on the effectiveness of QE. The effect of more or less risk sharing on the cost of market funding is unclear. Less risk sharing may increase the funding cost if national governments behave the same way in the presence of more and less risk sharing. However, if more risk sharing leads to moral hazard, then the effect of risk sharing on funding cost is most unclear.
Panicos Demetriades University of Leicester Agree Very confident
The absence of risk sharing partially defeats the purpose of the exercise, although I appreciate that this may have been the best that could have been agreed by the Governing Council under the curcumstances. It is indeed likely that several countries are likely to face higher borrowing costs as a result, for the reasons provided by Giavazzi and Tabellini. Relatedly, there's also a new risk to central bank independence that arises from these arrangements, as politicians at the national level will, in effect, decide whether to honour their obligations to the national central bank, which can be used as means of putting pressure on the central bank on other issues. The threat of central bank insolvency and the process of recapitalisation this will instigate, are powerful tools in the hands of politicians who want to exercise control over their national central banks. In the end the central bank may end up being a senior creditor but not without a dent in its independence. This creates longer term risks to the viability of the euro and the effectiveness of monetary policy.
Jim Malley University of Glasgow Agree Not confident
Michael McMahon University of Warwick Neither agree nor disagree Confident
I think the important detail is what we are comparing. If we are comparing a US- or UK-style, single-central-bank implemented QE then I think the ECB programme may be somewhat less effective. It would also be better if the programme was a hypothetical one that absorbed more of the risk and included incentives to expand lending to the small and medium enterprise sector. This suggests an answer of "agree". But if the alternative is no programme at all, then I think the ECB design is more effective given the economic situation in the euro area. It has already taken a long time to get the compromised version into play, and by all accounts it was only with the concessions that the policy has come in. This suggests "disagree". I opted for the middle ground but should note that I welcomed the extra policy action by the ECB.
Jonathan Portes National Institute of Economic and Social Research Disagree Not confident
In current circumstances I think the impact on market interest rates/market behaviour and hence on the effectiveness of eurozone QE is likely to be relatively modest.
Jagjit Chadha National Institute of Economic and Social Research Disagree Very confident
It is the size of the central bank balance sheet and its composition, as well as the duration of the purchases, that mostly matters for the effectiveness of QE operations. The question of whether the ECB in Frankfurt or the NCBs dotted around the Euro Area hold the risk seems at best a second order issue.
Charles Nolan University of Glasgow Agree Very confident
David Miles Imperial College Disagree Confident
Richard Portes London Business School and CEPR Strongly Agree Very confident
David Bell University of Stirling Agree Not confident
It is fanciful to expect that the market will ignore the allocation of risk.
Wendy Carlin University College London Agree Not confident
Patrick Minford Cardiff Business School Disagree Confident
This argument about credit risk neglects political commitment. Under M. Draghi the ECB has committed itself to keeping down the yields of government bonds via 'OMT'. Furthermore politicians of all relevant countries have shown clear aversion to leaving the euro- even in countries most likely to, such as Greece. It is true that a country could go bankrupt within the euro and if so its government bonds held by its national central bank would be worthless; yet we are also to believe that the ECB is made up of its national central banks (there is nothing else after all) and so this means the ECB loses some of its capital, thus effectively sharing the risk. Since even the most hopeless euro-zone countries, notably Greece, have not been allowed to go bankrupt, this seems an arcane consideration. In fact the whole notion that credit risk in buying national government bonds is *not* shared by the ECB seems far-fetched. As has been widely noted, the ECB has extended a mass of credit to private banks in particular countries, using facilities from other member countries' central banks- the Target-2 balances. Yet the credit risk associated with this is shared as long as all countries continue in the euro. So under the proviso of commitment to continuation of the euro and the avoidance of threatening country bankruptcy or departures from the euro, there is no problem with the QE programme's effectiveness. I interpret the total unwillingness to allow departures in this sense; once countries leave, the commitment here unravels and ECB policy is undermined from many directions. Thus credit risk attaches to national central banks, the OMT programme comes under pressure as governments become risky again, and the ECB's viability itself comes into question. The truth is that the ECB is the sole euro-zone governmental institution. Its power to govern- stimulate money and activity- depends on the assent of the national governments. If that commitment went, the ECB could not fulfil its functions. But as long as it stays the ECB's wrigglings to satisfy reluctant participants are just seen as effective manoeuvres to get QE done.
Michael Wickens Cardiff Business School & University of York Agree Not confident
Neither argument is persuasive. QE has had little or no effect in increasing credit in the eurozone (or in the US, the UK and Japan) and so will be be very unlikely to raise economic activity and hence inflation. The correct role and the real problem for the ECB is how to bail out solvent but temporally threatened national banks many of which have been forced to hold their nation's debt. Supranational buying national government debt is fiscal policy. It spreads risk to the whole eurozone. It also distorts the price of national debt by disguising its riskiness. This riskiness should be priced in and not artificially suppressed. Hence the eurozone is in danger of doing exactly the wrong thing.
Sean Holly Cambridge University Strongly Disagree Very confident
Paolo Surico London Business School Disagree Not confident
Andrew Scott London Business School Agree Confident
Alan Sutherland University of St. Andrews Agree Not confident
Angus Armstrong National Institute of Economic and Social Research Strongly Agree Very confident
What is the measure of effectiveness? Surely the objective goes beyond increasing base money; that is simply the operational outcome. If the objective is to increase broad money or nominal GDP - I would argue the objective of QE - then the limited risk sharing will reduce the effectiveness of QE when there is real concern about the solvency of a government. The limited risk sharing increases the probability of the central bank becoming insolvent compared to with risk sharing. And since the government would not be able to re-capitalise it, this carries the risk of capital flight. This would reduce the probability of the objective being achieved. As we know from the recent Greek negotiations, it is far from clear that other EU members are prepared to support an insolvent government. Indeed, one could argue that the greater the QE programme, the more this increases the risk for the central bank if the government is insolvent (or cannot access private markets).
Sir Christopher... London School of Economics Agree Confident
National central banks take on the risk but cannot monetise the debt in the event the government cannot pay and cannot affect interest rates. It's an odd situation that might deter private lenders. Banking union with one central bank should mean exactly that
Silvana Tenreyro London School of Economics Agree Confident
I agree the the way the ECB has designed its QE programme will reduce to some extent its effectiveness, but on the other hand, it is preferable to inaction.
Francesco Caselli London School of Economics Disagree Not confident at all
Maybe a tiny bit but it seems a very second order effect.
Jan Eeckhout University College London Disagree Not confident
Andrew Mountford Royal Holloway Neither agree nor disagree Not confident at all
Costas Milas University of Liverpool Disagree Not confident

Risk sharing arrangement and the fragility of the Euro

Participant Answer Confidence level Comment
Wouter Den Haan London School of Economics Neither agree nor disagree Not confident
I think this is impossible to tell. More risk sharing could be beneficial for countries getting into trouble, but less risk sharing may provide better incentives for countries to invest in their own future and reduce the chance they get into trouble.
David Cobham Heriot Watt University Neither agree nor disagree Not confident
Again, it depends on the circumstances.
John Driffill Birkbeck College, University of London Disagree Confident
A differently designed programme may have been better from this point of view, but the actual one does not increase fragility. The weakening of the Euro helps exports and discourages imports, modestly, perhaps. Lower yields on long-term debt slightly lower the cost of financing public debt, slightly relax fiscal constraints, and modestly encourage spending. This all helps keep countries in the Euro zone.
Ethan Ilzetzki London School of Economics Agree Confident
Fabien Postel-Vinay University College London No opinion Not confident at all
David Smith Sunday Times Disagree Confident
Any fragility is due to the design of the eurozone, rather than the design of the QE programme, and the risks of a member country leaving have diminished.
Ray Barrell Brunel University London Disagree Confident
The Eurosystem’s risk sharing agreement reduces the risk of a Grecian slide in to unsustainability and hence makes monetary union more robust. The European Monetary Union is made up of multiple sovereigns and hence it must have different rules from the US monetary union which has one sovereign. If the US Federal Reserve system buys US government bonds and the US government defaults on those bonds it is liable for the losses made by the FRB. There is no real gain to the US government. Under current arrangements if a European government defaults then the losses within the Eurosystem will be the liability of the issuing government, exactly as in the US. If the risk sharing arrangement within the Eurosystem were different then the taxpayers behind the non-domestic holders of the defaulted bonds would have to pay a ‘tax’. Hence there is a risk that excess debt would be issued by countries trying to game the system.
Martin Ellison University of Oxford Neither agree nor disagree Not confident
The lack of risk sharing within the ECB programme is in itself unlikely to increase the Eurozone fragility. Whilst this is true mechanically, it does show a more general lack of appetite for risk sharing within the Euro Area. If countries cannot agree to share risk on a fairly uncontroversial new programme then that does not bode well for the type of risk sharing reforms that will ultimately be needed to keep the Euro Area together.
Ricardo Reis London School of Economics and Columbia University Agree Confident
On the one hand, the structure of the program protects the solvency of the ECB and it prevents a redistribution of resources among member states, which is against its mandate but which the ECB has been pressured and/or tempted to do. So, insofar as the euro is irreversible, then the structure makes the Eurozone more robust. But, on the other hand, if we consider the possibility that one country may choose to leave, and that TARGET II and/or ELA balances would be reneged on, then this arrangement encourages local banks/citizens/speculators to run on their local banks and force an exit.
Paul De Grauwe London School of Economics Strongly Disagree Very confident
Nicholas Oulton London School of Economics Agree Very confident
The failure once again of Eurozone countries to agree that "we are all in this together" surely makes the eventual exit of one or more countries more likely.
Akos Valentinyi University of Manchester Strongly Disagree Extremely confident
The structure of the ECB's QE programme does not make the Eurozone more or less fragile. The lack of fiscal union makes the Eurozone more fragile. And the structre of the ECB's QE programme is a simple reflection of that.
Panicos Demetriades University of Leicester Agree Very confident
See my reasoning above. There are of course temporary benefits by the QE programme in terms of liquidity boost. But at the same time, the programme will also helps to shift most of the risk of eurozone failure from the private sector to the public sector.
Jim Malley University of Glasgow Agree Not confident
Michael McMahon University of Warwick Agree Confident
Jonathan Portes National Institute of Economic and Social Research Agree Confident
The issue is less about the direct impact (which in current circumstances is likely to be marginal) than the signalling effect: the structuring, and the internal debate and compromise within the ECB it reveals, clearly implies that there are possible circumstances in which monetary union could be reversed.
Jagjit Chadha National Institute of Economic and Social Research Disagree Very confident
I like to think that QE was desperately required in order to prevent a deeper and longer crisis in the Euro Area. Without it, it seems to me that it was more likely that any one country might leave the Euro Area.
Charles Nolan University of Glasgow Neither agree nor disagree Confident
David Miles Imperial College Disagree Confident
Richard Portes London Business School and CEPR Agree Confident
David Bell University of Stirling Agree Confident
This follows from the previous answer
Wendy Carlin University College London Agree Confident
Patrick Minford Cardiff Business School Disagree Confident
Comparisons with the US get us nowhere. The euro is a creation totally dependent on the commitment of the participating governments. Its 'fragility' consists purely in that. The dollar does not suffer from this because the US is one country. As I argued above on Q1 all this talk of who has the credit risk is arcane; if a country leaves the euro and goes bankrupt, other countries will wind up with large unpaid debts, thus inevitably the risks of the enterprise- whether OMT, Target-2 balances or QE- are shared. However the curious thing about the euro is that it has been given overriding priority by participating governments in spite of the economic disasters it has provoked. The criticisms of it that were widely made by sceptical economists have turned out to be totally and tragically accurate. Yet still it ploughs on. As long as politicians do not deviate from this priority, it will remain and avoid its fragility. Only if a new generation of politicians should somehow come on the scene and rethink this commitment, would the structure die. One can look at it this way: the euro is not fragile and the ECB policies not at risk provided euro politicians remain quite irrationally attached to its existence. There is no sign of any end to this irrationality.
Michael Wickens Cardiff Business School & University of York Strongly Agree Very confident
It is being in the eurozone that is the problem . Nations are then unable to bail out their own banks. Given its inflation remit and the ineffectiveness of QE, there is little that the ECB can do to help.
Sean Holly Cambridge University Disagree Confident
Paolo Surico London Business School Disagree Confident
Andrew Scott London Business School Neither agree nor disagree Confident
Alan Sutherland University of St. Andrews Neither agree nor disagree Not confident
John VanReenen London School of Economics Disagree Not confident
Angus Armstrong National Institute of Economic and Social Research Strongly Agree Very confident
In a monetary union it should not matter where the losses arise (e.g. which regional Fed or national central bank) as both can be easily re-capitalised by the same government. But where there is no central government, as in the case of the Eurozome, the solvency of the regional or national governments becomes important. The design of the QE programme, and comments from ECB board members, seem to reflect this recognition. The next shock to the Eurozone is likely to see this issues resurface.
Sir Christopher... London School of Economics Agree Not confident
A national central bank might think that outside the euro it would be able to monetise the debt. Its government might think that it can have bigger influence over its central bank. But I voted "not confident" because I think that without QE the risk of a country leaving is even higher: A better planned QE would have reduced the risk by more.
Silvana Tenreyro London School of Economics Agree Confident
When compared to the alternative QE with more risk sharing, I agree this makes the Eurozone more fragile. But again, if the benchmark is inaction, this QE programme is preferable.
Francesco Caselli London School of Economics Disagree Not confident
Again this seems a very second order problem to me.
Jan Eeckhout University College London Disagree Confident
Andrew Mountford Royal Holloway Neither agree nor disagree Not confident at all
Costas Milas University of Liverpool Disagree Confident
I would not say so. Although not officially stated, limited risk sharing is probably related to the fact that some Eurozone countries are much further behind than others in terms of structural reforms. This lack of structural reforms undermines economic growth, adds to sustainability issues and indeed makes Eurozone more fragile. I would imagine that progress in terms of structural reforms would (at some stage) take out of the picture limited risk sharing but Eurozone’s leaders need to become explicit about this. Take for example Greece. Greece’s need for structural reform is captured by World Bank’s government effectiveness index. The index, which captures perceptions of the quality of the civil service and the degree of its independence from political pressures, reveals the extent of the problem. Among 215 countries, the index currently ranks Greece at the disappointing 67th percentile. Both Portugal and Spain, Eurozone’s other peripheral countries who have gone through similar financial experiences to Greece, are ranked above the 83rd percentile whereas Germany is ranked at the 90th percentile.