By Tom Fairless and Brian Blackstone
FRANKFURT--The European Central Bank is nearing a landmark
decision to wind down its $3 trillion bond-buying program, closing
a chapter on a policy the U.S. used to help restore its growth but
one that had mixed results in Europe.
ECB officials are expected to confirm plans to end new bond
buying, known as quantitative easing, at their meeting on Thursday.
The ECB will thus become the third leading central bank to wind
down QE, after the Federal Reserve and Bank of England. Japan's
central bank is still buying bonds.
The ECB's journey was complicated by the bloc's unique setup: 19
countries, each with their own tax and spending policies, sharing a
single currency. That made it hard to design a one-size-fits-all
response to falling consumer prices and high unemployment in some
parts of Europe. Using freshly created money to buy government debt
drew the ECB into Europe's political battles.
The bank's program was originally designed to last 18 months and
total around EUR1 trillion. It has ended up lasting almost four
years and costing EUR2.6 trillion ($2.96 billion). Some argue it
also helped fuel the rise of populist euroskeptic parties now
challenging mainstream politicians, who blamed the ECB for bailing
out weak southern economies with northern funds.
"I think QE for the ECB has been economically a success and
politically almost a disaster," said Stefan Gerlach, chief
economist at EFG Bank who was Ireland's deputy central bank
governor when the ECB announced bond buying in January 2015. "That
all comes from the fact that the euro area isn't a single economy,
it's a bunch of sovereign countries."
After the late start, the ECB is ending new purchases years
after the Fed and Bank of England, and at an awkward time. Economic
growth slowed last quarter to its weakest level in four years with
its biggest economy, Germany, contracting. Global financial markets
have turned choppy, and Italy appears to be heading into
recession.
"I don't know why the ECB is in such a rush," said Joseph
Gagnon, economist at the Peterson Institute for International
Economics.
If a more pronounced downturn is indeed on the horizon, the
ECB's late exit could complicate its response. While the Fed has
reduced its balance sheet in recent years and gradually increased
interest rates, it will likely take years for the ECB to shrink its
bondholdings. Its negative interest rate makes it hard to use that
tool to juice growth.
But ECB officials have shrugged off recent warning signs, having
already scaled back the size of their bond purchases for months.
"There is certainly no reason why the expansion in the euro area
should abruptly come to an end," ECB President Mario Draghi said
last month.
The ECB could soften the blow to investors on Thursday by
detailing its strategy of reinvesting proceeds from maturing bonds,
to keep its balance sheet stable. Buying a larger share of
longer-dated bonds, for instance, could provide extra stimulus.
Another soothing signal would be to confirm that it won't raise its
minus 0.4% policy rate--its key rate--before late 2019.
Each of its coming policy steps could rattle already-fractious
financial markets.
"The process of exiting QE is going to be messy because you have
to put risk back into the system, you have to price risk," said
Catherine Mann, global chief economist with Citi. "And that will be
messy because it's been free for 10 years."
The ECB started buying bonds in early 2015, months after the Fed
ended its own long-running program that it created during the
global financial crisis in 2009. Quantitative easing lets central
banks which have already lowered interest rates to close to zero
buoy faltering economies by buying government bonds and other debt
to reduce long-term interest rates.
But when the Fed and other central banks were buying bonds, the
ECB was confronting a debt crisis that started in 2010 in Greece
and later expanded to Portugal and Ireland. That made it harder to
buy bonds without making it look like the ECB was illegally bailing
out weak European governments that couldn't finance themselves in
markets.
Complicating matters more, Germany's influential central bank
opposed quantitative easing and previous bond programs that were
smaller in scope.
By many measures, buying bonds had a big impact. Eurozone growth
exceeded the U.S. in 2016 and 2017, and the region created about
195,000 jobs a month over the lifetime of QE, roughly the same as
the U.S. Annual inflation was 2% last month, slightly above the
ECB's target.
The biggest beneficiary was Germany despite the Bundesbank's
opposition, as a weaker euro juiced exports. "Nobody in German
industry will say, I'm a great fan of Mario Draghi's policy," said
Andreas Moeller, an executive at Trumpf GmbH, a machine-tool
manufacturer in southern Germany. "But when we look at the numbers,
of course we see positive effects."
His firm's sales have risen about 10% to 12% annually in recent
years. Revenues were bolstered by a weak euro, low borrowing costs
and economic recovery in large markets like Spain and France.
To achieve this impact, the ECB bought tens of billions in
government and corporate debt each month, effectively absorbing all
of the new debt issued by eurozone governments during most of the
last four years, swelling its balance sheet to 40% of the region's
economic output, compared with around 20% for the Fed.
Still, Peter Praet, the ECB's chief economist, marveled recently
that the bank largely achieved its goals despite vast unknowns
surrounding bond buying and negative rates. Yet he struggled to
relate to his wife in a recent conversation why it took so much
money to get there.
"I tell her we spent two trillion euros to move inflation by a
few tenths of a percentage point," he recalled. "It sounds
crazy."
Write to Tom Fairless at tom.fairless@wsj.com and Brian
Blackstone at brian.blackstone@wsj.com
(END) Dow Jones Newswires
December 12, 2018 05:44 ET (10:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.