Ever since the euro-zone crisis escalated dramatically in the autumn
of 2011, financial markets have been clamouring for a programme of
large-scale government bond purchases by the European Central Bank aimed
at restoring confidence in Europe's ailing economy.
After successive disappointments, the issue for investors is not whether the central bank has the gumption to act, but whether the deep disagreements among the 25 members of the ECB's governing council have caused irreparable damage to the bloc and the single currency.
Germany's influence looms large over the management of the euro-zone crisis - and particularly over the conduct of European monetary policy.
While Germany's central bank, the Bundesbank, has long been a staunch opponent of government bond-buying on the grounds that it blurs the lines between fiscal and monetary policy and, if unlimited in size, would be illegal under the European Union's core treaty, its government has been more pragmatic.
It even gave its blessing to the ECB's 2012 bond-buying programme, which was known as outright monetary transactions.
However, Berlin's stance on a large-scale stimulus programme for the euro zone has hardened significantly over the past few months, and can now best be described as "Bundesbank lite".
Angela Merkel, Germany's chancellor, has become more concerned about the unintended consequences of monetary stimulus.
The outright monetary transaction scheme led to a 2½-year-long period of calm in euro-zone financial markets, which relieved pressure on governments (in particular those of Italy and France) to undertake important fiscal and structural reforms.
As far as Germany is concerned - and indeed in the view of many euro-zone watchers - sovereign quantitative easing is not the answer to Europe's underlying problems, which are a dearth of labour and product market reforms to boost competitiveness and increase the bloc's long-term growth rate.
What is even more worrying is that investors themselves have little faith in the effectiveness of quantitative easing.
The results of a survey of economists published earlier this month showed that while the vast majority believed the ECB would undertake sovereign quantitative easing, most were of the view that a large-scale bond-buying scheme would do little to boost growth and inflation.
The disconnect between the certainty that full-blown quantitative easing would be launched and the lack of faith in its efficacy is striking and is the strongest sign yet of the widespread waning confidence in central banks.
Yields on euro-zone government bonds have fallen sharply over the past few months because investors expect deflation - or, at the very least, "lowflation" in the words of the International Monetary Fund - to persist for a considerable period of time.
According to Bank of America Merrill Lynch, the volume of negative-yielding government debt in the euro zone has more than doubled from about €500 billion (HK$4.5 trillion) in October.
Equity markets are more sanguine about the likely effects of quantitative easing.
German stocks have risen 2 per cent over the past three months on hopes that sovereign quantitative easing will weaken the euro further - Europe's single currency has already lost a further 7 per cent against the US dollar over the past month - and provide a fillip to Germany's export-driven economy.
Yet, the sharp decline in the euro is hardly a sign of confidence in the single-currency area.
If the price that the ECB must pay to get sovereign quantitative easing off the ground is that national central banks shoulder the risks of buying their respective governments' bonds, serious questions could be raised about the supposed singleness and integrity of the euro zone.
A bond-buying programme big enough to mask the political and technical weaknesses of the scheme is not going to repair that damage.
Read more: Euro-zone political divisions undermine ECB policy plans | South China Morning Post
After successive disappointments, the issue for investors is not whether the central bank has the gumption to act, but whether the deep disagreements among the 25 members of the ECB's governing council have caused irreparable damage to the bloc and the single currency.
Germany's influence looms large over the management of the euro-zone crisis - and particularly over the conduct of European monetary policy.
While Germany's central bank, the Bundesbank, has long been a staunch opponent of government bond-buying on the grounds that it blurs the lines between fiscal and monetary policy and, if unlimited in size, would be illegal under the European Union's core treaty, its government has been more pragmatic.
It even gave its blessing to the ECB's 2012 bond-buying programme, which was known as outright monetary transactions.
However, Berlin's stance on a large-scale stimulus programme for the euro zone has hardened significantly over the past few months, and can now best be described as "Bundesbank lite".
Angela Merkel, Germany's chancellor, has become more concerned about the unintended consequences of monetary stimulus.
The outright monetary transaction scheme led to a 2½-year-long period of calm in euro-zone financial markets, which relieved pressure on governments (in particular those of Italy and France) to undertake important fiscal and structural reforms.
As far as Germany is concerned - and indeed in the view of many euro-zone watchers - sovereign quantitative easing is not the answer to Europe's underlying problems, which are a dearth of labour and product market reforms to boost competitiveness and increase the bloc's long-term growth rate.
What is even more worrying is that investors themselves have little faith in the effectiveness of quantitative easing.
The results of a survey of economists published earlier this month showed that while the vast majority believed the ECB would undertake sovereign quantitative easing, most were of the view that a large-scale bond-buying scheme would do little to boost growth and inflation.
The disconnect between the certainty that full-blown quantitative easing would be launched and the lack of faith in its efficacy is striking and is the strongest sign yet of the widespread waning confidence in central banks.
Yields on euro-zone government bonds have fallen sharply over the past few months because investors expect deflation - or, at the very least, "lowflation" in the words of the International Monetary Fund - to persist for a considerable period of time.
According to Bank of America Merrill Lynch, the volume of negative-yielding government debt in the euro zone has more than doubled from about €500 billion (HK$4.5 trillion) in October.
Equity markets are more sanguine about the likely effects of quantitative easing.
German stocks have risen 2 per cent over the past three months on hopes that sovereign quantitative easing will weaken the euro further - Europe's single currency has already lost a further 7 per cent against the US dollar over the past month - and provide a fillip to Germany's export-driven economy.
Yet, the sharp decline in the euro is hardly a sign of confidence in the single-currency area.
If the price that the ECB must pay to get sovereign quantitative easing off the ground is that national central banks shoulder the risks of buying their respective governments' bonds, serious questions could be raised about the supposed singleness and integrity of the euro zone.
A bond-buying programme big enough to mask the political and technical weaknesses of the scheme is not going to repair that damage.
Read more: Euro-zone political divisions undermine ECB policy plans | South China Morning Post
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