Gavyn Davies: Does the ECB really have a silver bullet?
This post was written by John McHale
Gavyn Davies has a useful piece in today’s FT highlighting the potential inter-country distributional consequences of ECB actions in support of particular countries (see here). These consequences are critical to understanding the economics and politics of ECB interventions. A few key paragraphs:
The implication of this analysis is that the ECB has more than enough “capital” to underwrite the peripheral bond markets, without this being inflationary in the long run. In a single nation state, it would probably prove irresistible to bring forward some of this capital from the future into the present, and then use it to purchase government bonds to resolve the crisis. In countries like the US and the UK, the national treasury could, in extremis, simply command the central bank to do this, which is why independent nation states typically cannot be forced to default on their domestic currency debt (although they might choose to do so by inflation).
The situation of the ECB is different for the now-familiar reason that the institution is the central bank of many nation states, which care very much about the distribution of income and wealth between themselves. The use of the central bank’s non-inflationary capital does not get round this fundamental issue. Since the ECB is owned by all of its members in proportion to their share of eurozone GDP, the future seigniorage of the ECB is similarly owned by all of its members.
If the ECB board chooses to use its notional capital today by buying Italian bonds at subsidised rates, it is in effect triggering a transfer of resources to Italy, away from other members, most notably Germany. This could emerge in the form of ECB losses which might need to be to be recapitalised by member states after an Italian default. Or it might emerge as a reduced flow of future profits from the ECB to nations like Germany. In any event, there would be an implied transfer of resources from Germany to Italy, which is precisely what the German government has opposed implacably.