The expectation is building up again ahead of tomorrow's ECB meeting. Stocks are rising, with investors full of hope that ECB President Mario Draghi will finally announce what the markets have demanded for years: quantitative easing.
Except, he won't.
There will be disappointment, again, and people will be saying that "Europe just doesn't get it." But doesn't it?
Perhaps Draghi is right to resist quantitative easing in the classical form of buying government bonds direct, as has been done by the Federal Reserve and the Bank of England. Such a policy would simply hurt Europe more than help it.
First of all, indirectly, the ECB has been carrying out some sort of quantitative easing for a long time by accepting all sorts of instruments as collateral at its auctions of liquidity for banks and by lending to commercial banks in the eurozone at very low, negligible, interest rates. These banks then go out and buy the debt of eurozone periphery states. How else would you explain the narrowing of the spreads between the yield on the debt of a eurozone country seen as problematic, like Spain, and that on German debt?
Secondly -- and not a negligible point -- buying government bonds directly would be illegal under the eurozone's rules, which forbid the central bank's monetizing of a member state's debt.
The relevant article in the Lisbon Treaty is below:
Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as 'national central banks') in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
This is why the ECB has had to resort to commercial banks to introduce its own kind of quantitative easing. It simply cannot get around this article in the law.
A third point, which is often overlooked, is that the eurozone doesn't actually need quantitative easing. Looking at what happened in the U.S. and in the U.K., it is difficult to say how much of the recovery is due to printing money and how much is due to the fact that these economies are, in fact, more flexible and easier to adapt than the ones in the eurozone. Yes, quantitative easing has boosted asset prices in these economies, particularly stock markets in the U.S. and property in the U.K. But the eurozone does not depend on asset prices as much. So, boosting asset prices there would not have engineered a recovery. In fact, the effect of quantitative easing elsewhere has already been felt in the eurozone. German house prices, for instance, have increased rapidly, but this didn't result in a positive spill-over for the rest of the German economy.
What countries in the eurozone need is a boost to the real economy, the small- and medium-size companies that make and sell things and form the backbone of the single currency area. For them, Draghi has already announced the ECB is preparing some sort of quantitative easing: the buying of securities backed by loans taken out by SMEs.
Fourth, Draghi himself doesn't believe in quantitative easing, at least not judging by his speech at Jackson Hole (despite the fact that many in the markets have chosen to interpret what he said as a nod toward buying government bonds directly). In that speech, what he said was that European countries need to ease their austerity stance and nearly begged Germany -- which posted the biggest budget surplus since reunification in the first half of 2014 -- to start a fiscal stimulus program. Yes, he said the ECB stands ready to help, but he has always said the central bank supports governments' reforms.
A fifth argument is that this month will see the actual launch of the program that Draghi announced with a lot of fanfare back in June. The first of two successive targeted longer-term refinancing operations (TLTROs) will take place in September, with the second slated for December. The purpose of the operations -- which will offer very cheap funds for longer term to banks in the eurozone, on the condition that they lend them on to non-financial companies -- is to unblock credit for small- and medium-sized companies. Together with purchases of asset-backed securities consisting of company loans, this might just work to re-launch the single currency area's clogged economy.
And last, but by no means least, let's not forget that the ECB will next month announce the results of its asset quality review on banks in the eurozone, before taking over as their single supervisor. It must keep some powder dry for the possibility -- remote as it seems now -- of sudden market panic in case the review reveals less-than-pleasant facts.