From Ambrose Evans-Pritchard:
The IMF’s Christine Lagarde said this week that the world in in danger of a “low-growth trap” and called on the ECB to step up to its responsibilities. “More monetary easing, including through unconventional measures, is needed in the euro area,” she said.
Repeated criticism from the IMF is ruffling feathers in Frankfurt, where the ECB’s hardliners view bond purchases as a covert rescue for countries that live beyond their means. “The IMF has been very generous in its suggestions on what we should do,” said Mr Draghi in a sarcastic tone.
Mr Draghi must walk a political tightrope, biding his time as he gently cajoles the ECB’s German-led bloc to accept more stimulus. The Bundesbank’s Jens Weidmann appeared to drop his vehement opposition to QE last month but that does not end the dispute. Nor is it clear exactly what is allowed within the ECB’s mandate.
A recent ruling by the German constitutional court said the ECB’s bond rescue plan for Italy and Spain is a breach of EU treaty law and probably “ultra vires”, a term that would prohibit the Bundesbank from taking part.
While the ruling does not ban QE as such, it raises the political bar in Germany. The rest of the ECB has the votes to force Germany’s hand but any such move – if pushed too far – would violate the sacred contract of EMU that German sensitivities over monetary orthodoxy must be handled with care.
The Bundesbank may not be willing to act unless the eurozone is at imminent risk of full-blown deflation, but this may be too late. The IMF says that even chronic “lowflation” of around 0.5pc would cause the debt trajectories of Italy, Spain and even France to ratchet higher.
From the ECB non action today, the only logical conclusion is that they are dead set in reliving Japan´s experience since the early 1990s. The irony is that the ‘guy’ who was there wants out!