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 The concern is that the bond-buying plan launched on Monday to pump
more than a trillion euros into the 19-country economy will send
stronger members such as Germany that could arguably do without the
support into overdrive, while fostering complacency among laggards.
The plan is aimed at lifting euro zone inflation from below zero
back up toward the ECB's target of just under 2 percent. But the
risk is that it inflates real estate and share price bubbles and
might cause Europe's biggest economy, which already has record low
unemployment of 6.5 percent, to overheat.
Such a scenario could widen the gap between rich and poor member
states, further stretching the already strained fabric of European
integration, tested again this week when Greece's finance minister
accused the ECB of "asphyxiating" Athens.
On the face of it, the ECB is upbeat.
The central bank projects its plan to print money to buy sovereign
bonds – so-called quantitative easing (QE) – will turbo-charge a
frail euro zone recovery that is already being helped by lower oil
prices and a revival in bank lending.
This is crucial. Had the ECB launched the plan last year when growth
was stagnant and banks were reining in credit, the new money would
have had a harder time finding its way into the economy - and the
stimulus might have fallen flat.
"We did it just at the turning point," one senior euro zone central
banker said of the QE launch, confident the plan can help buoy the
economy and lift inflation.
The ECB and its constituent national central banks plan to spend 60
billion euros ($63.66 billion) a month, mainly on sovereign bonds,
until at least September 2016.
Buying sovereign bonds will hold down governments' borrowing costs
and keep market interest rates low, encouraging investors to move
into riskier assets that will spur growth, while also pushing down
the euro currency.
However, the speed and the extent of the euro's <EUR=> fall -- it
has tumbled 12.5 percent against the dollar so far this year, well
on track for the biggest quarterly loss since its launch in 1999 --
has taken many at the ECB by surprise.
TOO SUCCESSFUL?
Some ECB policymakers are concerned about the effects of the policy
genie they have unbottled, particularly the risks attached to
pinning market interest rates below zero.
"I'm a bit nervous about this -- that there might be something like
too much success," Governing Council member Ewald Nowotny said this
week. "I have the feeling we do not understand the full effect of
negative interest rates in many instances."
Updated forecasts by ECB staff this month projected the QE program
will raise growth rates in the euro zone and lift inflation from
below zero up to 1.8 percent in 2017 - in line with the ECB's goal
of just under 2 percent.
The ECB was conservative, predicting growth accelerating from 1.5
percent this year to 2.1 percent in 2017. In December, it predicted
growth of just 1.0 percent this year. Private economists say further
falls in the euro mean growth and inflation could outpace the
upgraded ECB estimates.
The risk is that QE will, as Nowotny says, bring too much success --
particularly in those countries that need it least. The dynamics of
the program will pin down borrowing costs in Germany just as a
consumer-led boom is taking off.
Under the plan, the overall volume of central bank bond purchases
will be constant in a given country even if yields on some
maturities hit the -0.20 percent level the ECB has set as a floor
for purchases - equivalent to its overnight deposit rate.
The national central bank in the country concerned - such as Germany
- would have to redirect its firepower to buy other maturities to
keep the total volume of the plan steady.
With yields on German sovereign bonds with maturities of up to 3
years around or below -0.20 percent, the lower limit for ECB
purchases, a disproportionate amount of money will be thrown at
longer-dated German securities compared to other countries.
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The bottom line: borrowing costs will stay particularly low for
Germans - just as inflation-beating wage deals and a little more
government investment point to a robust rebound this year.
Some economists acknowledge that QE may not be appropriate for
Germany but are resigned to the plan given the one-size-fits-all
nature of monetary policy in the single currency area.
"In Germany, you have a situation where we're moving towards
over-potential," an adviser to the Berlin government said. "But
we're in the monetary union, so there is one (monetary) policy."
Bundesbank chief Jens Weidmann told Reuters on Thursday the German
economy's "very robust shape" meant the national central bank would
raise its growth forecast for this year to around 1.5 percent from
1.0 percent seen in December.
Klaas Knot, the Dutch central bank chief, warned that ECB bond
purchasing may cause asset bubbles in some high-yield bonds,
government debt, and stocks.
"In a while it will be harder to identify the sectors where there is
no misalignment than to identify the sectors where there is
misalignment, I'm afraid," Knot said.
Both Knot and Weidmann, two leading ECB hawks, opposed the QE plan.
Nowotny and others at the ECB share their concerns.
"Germany is not exploding... but we must be careful," said another
senior euro zone central banker, adding that national authorities
can always implement measures to keep the financial system on an
even keel, such as setting limits on the multiples people can borrow
to buy a home.
"BAD HABITS"
At the same time, the arrival of a guaranteed buyer of sovereign
debt may bring temptations for the euro zone's weaker economies,
including France, which is worrying ECB officials with its go-slow
approach to budget consolidation.
"That can, of course, lead to bad habits and to countries putting
off the necessary consolidation of public budgets," Weidmann said of
the guaranteed-buyer factor.
If euro zone laggards let slip efforts to put their public finances
in order, they could lumber future administrations with a bigger
bill when borrowing costs rise, undermining any long-term recovery
and further straining the euro zone's cohesion.
Even if growth of the whole bloc accelerates and a debate ensues
about tapering QE, many states risk trailing behind Germany,
blighted by a lack of investment in recent years.
"While the central scenario is that QE should help on inflation and
on (economic) activity, it's difficult to pinpoint exactly what the
effect should be," said Francesco Papadia, a former ECB director
general for market operations.
"There is more uncertainty around it, which doesn't mean that you
shouldn't do it because in a cost-benefit calculation not doing it
would be even worse."
(Additional reporting by John O'Donnell; Editing by Paul Taylor)
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