The ECB can only buy time for Europe’s politicians
Central bank pursues macroeconomic objectives with imperfect tools, writes Mohamed El-Erian
This is not to say the ECB’s announcement will have no consequences. The additional injection of liquidity will support the value of equities and other risk assets. It will mean most eurozone governments, even in the more vulnerable periphery, can borrow at interest rates closer to those enjoyed by Germany — although there will be exceptions. And it will exert further downward pressure on the euro, which is already near its weakest level for 11 years.
Rather than preventing fragmentation and dysfunction in financial markets, the bank is looking to deliver outcomes that actually depend on policy adjustments largely beyond the reach of its own tools. When it comes to pro-growth structural reforms, a rebalancing of demand, combating excessive indebtedness, and completing an economic union among eurozone member countries, the ECB is dependent on political actors.
But this is unlikely to be sufficient to deliver a breakthrough in economic growth, or to decisively alter inflationary expectations; and it comes with the risk of collateral damage and unintended consequence.