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Why doesn't the ECB print money?

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  • 13-07-2011 9:40am
    #1
    GUIGuy
    Registered Users Posts: 246 ✭✭


    With the creation of the ECB member nations lost the ability to perform 'Quantitative easing' (print money). The ECB can only buy up government bonds to locally ease but does not have the power AFAIK to generally create new money. The buying of government/bank bonds come from real money that has to be balanced or the ECB could go bust.

    Was this intentional or an oversight? Here's an example. The money loan guarantees that the Germans gave us as part of the EU/IMF bailout is different in character to that given by the British.

    The British still have their own central bank and can and do print/create new money out of the air. The BOE last year created £200 billion extra to buy bonds. Granted this is independent of UK government but the 6 billion loan guarantee the British gave us is with the knowledge that if it things get a bit tight BOE can and does lend a hand. The German government has no such safety blanket!

    The obvious reason why central banks don't generally print money... potential hyperinflation. But in areas where their is stagnation and no risk of inflation would a localised injection of new money not help.

    I'd imagine the overall cost of a breakup of the Eurozone is larger to the cost of an injection to bring countries into line. It would cause no pain to bond holders either... but would go against orthodoxy.

    It might even have the positive effect of bringing down the value of the euro... which would make exporting counties happy and have little effect on debts that are denominated in Euro.

    I know its a 'dangerous' option that has huge moral hazard but in these times should it be considered and is the ECB even capable as currently constituted?


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    #2
    dynamick
    Closed Accounts Posts: 724 ✭✭✭dynamick


    The ECB is an independent body formed as part of a European treaty:
    http://www.ecb.int/ecb/legal/pdf/en_statute_2.pdf

    This constitution makes 'price stability' the overall objective of the ECB. Sadly, it does not define price stability. The ECB has defined price stability as keeping euro area HICP inflation as close to but below 2%
    http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html

    So the member states in theory cannot direct the ECB to do anything like printing excess money and to do so would conflict with its primary objective.

    Why is price stability the primary objective? It is often attributed to the memory of interwar hyperinflation in Germany. However, even double digit inflation as experienced by Ireland in the 70s and 80s is very destructive

    Could the ECB not just run off €100bn and give it to us? Yes, but that would reduce the value of all euros in existence by €100bn. So a similar result would be obtained by collecting €100bn from all eurozone members as a special tax, without printing any more cash or increasing inflation.

    Money printing pushes up sovereign bond rates because investors demand a higher return to compensate for the risk of future inflationary actions. NObody wants higher sovereign borrowing costs.

    Imagine that the ECB printed a load of new cash and gave it to us, even then we would still be in the hole because we still spend far more than we earn so every year we get poorer and become a worse credit risk.

    One theory is that all countries who print their own fiat money end up being tempted to print too much destroying the saving of their citizens and ruining the trust in their currency built up over the decades. When ireland had its own currency, this stunt was pulled at regular intervals.


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    #3
    PeadarCo
    Registered Users Posts: 1,915 ✭✭✭PeadarCo


    One of the issues is Germany. Germany has very bad memories of hyperinflation in the 1920's. This is one of the reasons why price stability is the ECB's overall objective.


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    #4
    richiek83
    Registered Users Posts: 172 ✭✭richiek83


    It is also important to remember that a Central Bank has other objectives also, such as aiding conditions for economic growth and employment growth. While price stability is commendable in normal economic times, it is not and should not remain as the sole objectvive considering the times we now find ourselves in. With Italy now brought into the mix, it is high time the ECB started broadening their approach to the crisis. This could mean printing money. The Federal Reserve in America has had two bouts of Quantitative Easing costing some 1.3 trillion dollars. This has not led to hyperinflation in the US. What we need throughout half of the Eurozone is increased money supply and done through QE.


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    #5
    Godot.
    Registered Users Posts: 528 ✭✭✭Godot.


    PeadarCo wrote: »
    One of the issues is Germany. Germany has very bad memories of hyperinflation in the 1920's. This is one of the reasons why price stability is the ECB's overall objective.

    This.


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    #6
    hmmm
    Registered Users Posts: 11,205 ✭✭✭✭hmmm


    You've said it yourself, it's a dangerous option. It penalises savers and those with fixed incomes (such as pensioners). It is difficult to control inflation, it's more akin to throwing petrol on a fire than turning a tap. If it goes wrong, the consequences could be catastrophic. Germany as people have mentioned got it wrong twice in the 20th century and we know what happened then.

    So why would the Germans or Dutch take this risk? To bail out a few feckless countries who aren't competent enough to run their own financial affairs? We'll be back here in a few years time when politicians in Greece and Ireland decide to open the spending taps again on the back of quantitative easing.


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    #7
    View
    Registered Users Posts: 3,872 ✭✭✭View


    richiek83 wrote: »
    It is also important to remember that a Central Bank has other objectives also, such as aiding conditions for economic growth and employment growth.

    Those may be worthy objectives but they are not ones directly assigned to the ECB by the member states of the EU. The ECB therefore must deal with its assigned tasks and rely on the member states of the EU to achieve the objectives you mention.


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    #8
    dynamick
    Closed Accounts Posts: 724 ✭✭✭dynamick


    The deal is that Europe funds our deficit and our banks until we get our budget to balance in about 2015. Some of our sovereign and bank debt may be written down at a time and in a manner prescribed by the EU/IMF/ECB. I doubt there is a cheap and easy way out.

    The UK has devalued its currency and as a result seen high inflation and a reduction in purchasing power for citizens of both imports and locally produced goods. The US is facing a sovereign debt downgrade, rising unemployment & a weakened currency susceptible to oil price shocks.


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    #9
    oppenheimer1
    Closed Accounts Posts: 6,084 ✭✭✭oppenheimer1


    PeadarCo wrote: »
    One of the issues is Germany. Germany has very bad memories of hyperinflation in the 1920's. This is one of the reasons why price stability is the ECB's overall objective.

    It destroyed savers but rewarded debtors. The hyperinflation in the Weimar republic eroded Germanys wartime debt down to 17 pence


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