The same reasoning goes for the bond purchases and monetary easing of the ECB.
By the beginning of the year, the ECB provided unlimited funds for the next 36 months under the newly adjusted 1% interest rate. The first December auction released €489bn of funds (even though the net increase in liquidity was reported to be lower according to the ECB) which reduced long term bond yields for every Eurozone country apart from Greece and Portugal. Banks used the released cash to buy government bonds which kept long term interest rates low.
But EU banks still have around €500bn on overnight deposits with the ECB, on an interest of 0.25% (this means, as I noted earlier in October, that banks would rather accept a loss by borrowing at 1% and depositing at 0.25%, then to take a risk and lend to the private sector). On the other hand these banks are facing higher capital ratios enforced by the EBA, when the value of their still held peripheral sovereign debt is falling (especially after the Greek default).
However, the policy did have an effect as Europe experienced a slightly better first quarter of 2012 than expected. What the policy did is that it created positive expectations among investors, proving once again that this crisis has a lot to do with confidence.
|Source: European Commission: Business and Consumer Surveys|
But even after a quick increase of confidence in January and February, in March things were starting to deteriorate again. The EC’s sentiment index reports:
“After improving in January and February, the Economic Sentiment Indicator (ESI) decreased in March by 0.8 points in the EU and by a marginal 0.1 points in the euro area... The decline was mainly driven by decreasing confidence in the industry and construction sectors. By contrast, confidence increased among consumers and in the services and retail sectors.”
As is noticeable on the following two graphs, while consumer confidence was seen slightly improving, business confidence again started to decrease.
|Source: Trading Economics|
Throughout the final quarter of 2011, more and more prominent analysts, economists and investors called for the ECB do step in and do more to save the euro and the entire Union. As a result a lot of investors were waiting what the ECB will do, as if the ECB is the only thing that can save them form losses. It is no surprise that its auction and the announcement of another, even larger one helped increase confidence among investors and, along with liquidity, released a bit of optimism.
But with all this liquidity released, who did the ECB really help? It helped the governments and their banks. The biggest problem is that investors will again start looking at the ECB as the investor confidence goes down again (just look at the recent Spanish bond auction), and this is not a good thing. More and more pressure will be put on the ECB to become the lender of last resort to governments.
But it won’t be able to withhold that pressure. All it can do is provide a temporary liquidity offer and easing to governments, but it won’t do any direct or indirect good for the businesses or the consumers. It won’t increase their confidence and it won’t help them grow or spend more. It is a strikingly narrow solution proposed by many as the main recipe for solving the eurozone crisis.
Here's an excerpt from a text by DeLong on that point (he makes it as a call for fiscal stimulus but the reasoning is clear and straightforward):
"The ECB could induce banks to make more loans, and fund more investment and consumption spending by credibly promising to raise its permanent inflation target – but it will not so promise, and it would not be believed if it did. The ECB cannot induce banks to make more loans and fund more investment and consumption spending by swapping bonds for reserves as long as the value of pure liquidity is zero and reserves are as good as – nay, better than – short-term bonds. The ECB could induce banks to make more loans and fund more investment and consumption spending by taking risk onto its balance sheet and so freeing-up scarce private risk-bearing capacity – but is that monetary policy? No, that is fiscal policy, albeit non-standard fiscal policy." DeLong, April 2012, VoxEU
The actual solution didn’t and won’t come from the ECB; it will come from pro-growth reforms enacted by the peripheral governments. Political stability, market liberalization, labour market reform, removing regulation and reducing the tax burden are policies much more likely to restore consumer confidence than anything the ECB is prepared to do.
Or else, you're stuck with this - starting a business in Greece:
"It took 10 months, a fat bundle of paperwork, countless certificates, long hours of haggling with bureaucrats and overcoming myriad other inconceivable obstacles for one group of young entrepreneurs to open an online store."
10 months for an online store?! These are the real issues the reforms must deal with: how to help business grow, how to restore confidence and let the market signals do their magic. Nothing that ECB does will help this country or any country with similar anti-business climate (recall my previous post on Hungary) to achieve economic growth.