Top economists in Davos clashed on Wednesday over the impending decision by the ECB to buy up sovereign debt, an unprecedented measure to fight deflation that powerful Germany believes would merely allow overspending eurozone states to put off reforms. Europe has squandered three years of opportunity to carry out badly needed economic reforms, former Bundesbank chief Axel Weber said at a panel in Davos, the ski resort hosting the global elite over four days at the World Economic Forum.
"The real issue is the ECB has continuously bought time for European policy makers to fix the issue," Weber said, reflecting the views of many in the current German government. But "they didn't do that", said Weber, who famously stormed out of his job at the Bundesbank when the ECB unveiled unconventional measures in late 2011. The ECB holds its first policy meeting of the year on Thursday and is widely expected to announce some sort of buy-up of sovereign debt, a measure known as quantitative easing. The European Central Bank has come to the rescue of the eurozone on several occasions since Greece nearly dragged down the bloc with its debt, unleashing a succession of unconventional measures since late 2011 to calm jittery markets.
However, growth remains sluggish, unemployment is high and the eurozone is in danger of sliding into deflation, forcing the ECB to consider deploying QE, widely credited with having helped boost the US and British economies. Adam Posen, the former central banker who sat on the policy committee of the Bank of England for three years, told AFP the threat of deflation was too great to be ignored any longer.
"What's dangerous are the people who oppose QE, who I think are wrong, are trying to make sure QE fails," said Posen, who was a major proponent of QE at the BoE. "We are very late in the game and I'm very concerned that Germany is going to keep the QE from as being as aggressive as they need it to be," Posen said.
Germany's aversion to the plan was also borne out in remarks by the ECB's former chief economist, who also resigned angrily after the bank accepted unconventional measures. The European Central Bank "wants to drive down the refinancing costs of individual countries. That is very different from traditional monetary policy," Juergen Stark told the business daily Handelsblatt. To placate Germany's opposition, reports from Berlin say the ECB has devised a bond-buying programme that will cater to their deep reservations about QE.
The news magazine Der Spiegel reported on Friday that ECB chief Mario Draghi presented this scheme to Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble aimed at allaying such concerns. Under the revised scheme, only national central banks will be allowed to buy the sovereign debt of their respective countries. Crucially, Germany, Europe's paymaster, will not be on the hook to bail out another country, the magazine said.
Kenneth Rogoff, the IMF's former chief economist, said if confirmed this step was politically necessary but would falter in the longer-term. "Even if (the ECB) makes the national banks hold debt I think they'll see it doesn't work as well and they'll go to something else," Rogoff told AFP. "I think it is part of a long process to get (QE) to work and it's a major step. It's the first vague step towards the mutualisation of debt," he said. Germany is increasingly singled out on the global stage for its resistance to looser monetary policy, with even China's top central banker lending his support to Draghi. "I agree with Mario Draghi. Monetary policy may create room, a time period for other policies to come out, to be implemented," said Zhou Xiaochuan. While a policy such as QE "is not a panacea ... it is still useful," he said.
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