The question of whether the European Central Bank (ECB) would be engaging in full-blown Quantitative Easing by buying the debt of Eurozone member states has been rumbling on for the past six months. The judgement last week by the European Court of Justice that there was nothing in the Treaty to prevent this in principle appears to have weakened German opposition and, while politician refuse to confirm any decision, the markets are rushing ahead, already lending money to Spain at one of the cheapest rates since the financial crisis; this in the expectation that its value will increase after QE begins.
The UK has looked smugly across the Channel at economies struggling with stagnation and deflation. But the real key to the UK's economic success relative to the Eurozone states is the focus on monetary policy. Most striking is the direct creation of money - £375bn of it - through the process known as quantitative easing (QE). QE is a tool to encourage banks to pump money into the economy. Central banks - the Bank of England in the UK - create money by buying securities, like government bonds, from banks using electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased--hence "quantitative" easing.
QE is supposed to stimulate the economy by encouraging banks to make more loans which in turn boosts investment. This money creation can also create indirect stimulus, for example if it is used for house purchases, thus encouraging new house building.
The money created through QE in the UK has had two consequences that have, depending on your perspective, boosted the economy or concealed the problems we are really facing. The first is the direct increase in 'liquidity'; the cash that is out there potentially making stuff happen. The impact of this has been limited by the fact that financial institutions have held onto much of the QE money, though it is impossible to say how much worse things might have been without the QE stimulus.
The other aspect of monetary policy that has provided an economic stimulus is the extended period of record low interest rates. While this loose monetary policy has boosted the economic statistics it has resulted in a massive transfer of wealth to the holders of financial and property assets. It has also undermined the financial situation of those reliant on savings and investment incomes, including many poorer pensioners. It has reduced the incentive for individuals and companies to reduce the debt they are holding. Until they do this, it is hard for policy-makers to return interest rates to reasonable levels, which causes problems elsewhere in the economy.
QE in the US, UK and Europe
In the US monetary policy has been even more dramatic, with monthly money creation on a massive scale. Since 2009 the Fed has bought some $3.5trn of Treasury bonds in an unprecedented intervention in the money markets. At the peak of the program it was buying $85bn worth of its own IOUs per month, which was gradually tapered from December 2013 until the policy was ended towards the end of last year.
Which brings us to the Eurozone. Unlike the UK, Euro area countries no longer have their own currencies but a shared one, which severely limits their room for manoeuvre in providing monetary stimulus at the nation-state level. The Treaty on the Functioning of the European Union, and more specifically its Article 123, explicitly forbids the direct purchase from the Treasury of government bonds by the European Central Bank (ECB) or National Central Banks. However, the Treaty does not formally prohibit the indirect purchase by central banks of government bonds held by private investors.
The Bank of England QE programme used such a strategy for injecting large amounts of central bank money into the economy on a vast scale. This sort of policy, although widely discussed, is much more controversial in the Eurozone and is particularly strongly resisted in Germany, where it is considered to be a circumvention of the spirit of Article 123. It is perceived as a modern version of printing money to finance government expenditures and hence as a gateway to inflation and fiscal irresponsibility.
The programme, expected to begin this Thursday, will allow the ECB to purchase the bonds of member states but the bonds will remain with the national central banks, a concession to German unease at the prospect of taking responsibility for the debt of the peripheral economies. It will none the less mean a huge injection of liquidity into the struggling Eurozone economies.
From a Green perspective, the justification for creating new money would be that it is invested in the transition to a sustainable economy that we so urgently need, as argued by the Green New Deal group earlier this week. It could be used to develop green energy infrastructure, improve our railways, or insulate our leaky homes. The mechanism is not complicated: the European Investment Bank (EIB) could produce new Green Bonds, thereby increasing its lending power.
However, this increased liquidity should be directly linked to lending to green businesses. Since such businesses may not be sufficiently profitable to attract the interest of profit-driven investors the Green Bonds would need to be purchased by the ECB with new money, not linked to debt, and created specifically for that purpose. This would have the effect of injecting money directly into the green economy.
Those of us who have decried the way the policies of austerity and monetary stimulus have been used to benefit the rich at the expense of the poor should be arguing now that, when the ECB loosens the purse-strings, it must use the principle of sustainability to guide how QE should be implemented.
An ambitious plan for financing a Green New Deal in Europe would ensure that the benefits of cheap money work for the common good of all European citizens and their shared climate rather than for the benefit of the elite few.