Monday, March 24, 2014

What Should the ECB Do?

Jeff Frankel has an interesting proposal: the ECB should go in for quantitative easing without skirting the EU constitutional treaty by buying US Treasury bonds rather than the sovereign debt of member states. The idea is that this would bring down the foreign exchange value of the euro.
The strength of the euro has held up remarkably during the four years of crisis. Indeed the currency appreciated further when the ECB declined to undertake any monetary stimulus at its March 6 meeting. The euro could afford to weaken substantially. Even Germans might warm up to easy money if it meant more exports rather than less.
Central banks should and do choose their monetary policies primarily to serve the interests of their own economies. The interests of those who live in other parts of the world come second. But proposals to coordinate policies internationally for mutual benefit are reasonable. Raghuram Rajan, head of the Reserve Bank of India, has recently called for the central banks in industrialized countries to take the interests of emerging markets into account by coordinating internationally.

How would ECB foreign exchange intervention fare by the lights of G20 cooperation? Very well. This year the emerging markets are worried about tightening of global monetary policy. The fears are no longer monetaryloosening as in the “Currency Wars” talk of three years ago. As the Fed tapers back on its purchases of US treasury securities, it is a perfect time for the ECB to step in and buy some itself.
It's an interesting idea.

1 comment:

Anonymous said...

Isn't a standard distinction in the norms of international finance and exchange rates that it is conceivably OK for a central bank to buy its own bonds for macroeconomic purposes, but it's outright currency manipulation for a central bank to start a concerted campaign to buy another country's bonds?

It's a useful distinction. It's partly what has allowed the US and the EU to criticize the macroeconomic/FX posture of China and other Eastern tigers without falling into gross hypocrisy or implicitly delegitimizing a significant tool in the standard central-bank toolkit. It's partly why the US, the EU, and international commentators have been pleased with Japan's central bank strategy, as opposed to China's.

The ECB, within the EU, has the capacity to solve its problems, above all by buying some weighted basket of Eurozone-member-state bonds, if it doesn't actually want to create a legitimate Eurobond. A recourse to mass-buying of US bonds is a reckless dip into outright currency war, not responsible central-bank macroeconomic management.