Can the ECB print money at no cost? Not at all

2011-11-30

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The voices calling the ECB to “do something” are increasing. Of course they are ignoring the fact that the European Central Bank is already intervening in the markets, doing much more than what many tend to believe. In its latest communique on November 28 the ECB admitted it has already used €203.5 billion for its Securities Markets Programme – to buy, in other words, sovereign bonds of the European periphery. If we consider that the SMP resumed in August to keep Italy and Spain above water and after knowing that the programme had accumulated approximately €73 billion before, we see that in the last four months the ECB has used more than €130 billion, which is a considerably high amount given that supposedly they are “doing nothing”.

But let us not play with numbers here and instead focus on money printing in general. Can you print money at no cost? Will that get society something for nothing? Ultimately is that the way to save the euro? In all cases the answer is “No – not at all”. The costs of allowing the ECB to monetize debts (“print money”) are many ranging from economic to political.

In my article titled “ECB and democracy: The traps of debt monetization” I painted the political drawbacks of such an act. The ECB has been given the unique task to administer a currency without a counterparty treasury with jurisdiction over the exact same area. This creates an institutional gap that if filled by the ECB alone, leads to all sorts of political imbalances, as the ECB is a supranational entity not a federal one as many falsely think. To bridge this gap in a credible manner, Treaty changes are required, which I doubt can be concluded successfully within the current rigid time frame. Not following the credible, democratic path of Treaty changes by just allowing the ECB to play two roles at once, can distort the political balance in the eurozone, in a highly unpleasant way by ultimately leading to power abuse (also see About the European Central Bank monetizing debts).

On the economic side, printing money has always been and will always be a way of postponing problems not solving them, at the extremely high cost of inflation (and moral hazard in our case). Those who argue that greatly expanding the money supply amid a recession does not lead to inflation are right only if we speak about the short term. Yet this argument holds true under all economic circumstances, as money expansion is not realized immediately, as prices require some time to adjust to the new reality. So it does not really provide any concrete support of the idea of debt monetization, as inflation will inevitably come into play. The qualitative difference between an inflation amid a boom and one amid a recession is that the later is actually far worse. A stagnant economy characterized by increasing unemployment and little to no growth, cannot wish for anything worse than a relatively high level of inflation, since if prices increase at a fast rate, the purchasing power of the already hardly-pressed consumer will diminish considerably, thus reducing even further his/her consumption, effectively leading on aggregate terms to even less growth, which implies a deepening of the recession.

It is important to realize that what we should consider is not just to get out of this crisis, but also the grounds we will prepare for such an exit. If we escape from this crisis, by placing the foundations of another one, we will have effectively done nothing more than a spectacular hole in the water. The crisis of the euro if solvable any longer, cannot and must not be addressed by ECB inflationary policies. More credible, system-wide measures are needed. Ones that will lead to robust growth after the exit, not prepare the environment for another free fall.