In his latest weekly note, John Hussman joins the sceptics who think the ECB will never intervene in sovereign debt markets to stop the crisis.
Over the past week, we’ve heard all sorts of propositions that the European Central Bank (ECB) “must” begin printing money to bail out Italy and other countries, because “there is no other option.” There are three basic difficulties with this idea. The first is that ECB buying might help to address immediate liquidity issues of distressed European countries, but it would not address long-term solvency issues, and would in fact make them worse. The second is that the ECB, under existing European treaties, has no such authority, and the prohibitions against it are very explicit. Changing that would be far more difficult than many market participants seem to believe, because it would require an explicit and unanimous change in the EU Treaties that AAA rated countries such as Germany and Finland vehemently oppose. The third difficulty is that even if the ECB was to buy the debt of distressed European countries with printed money, the inflationary effects would likely be far more swift than anything we’ve seen in the United States. This would not “save” the euro, but would simply destroy it by other means.
Investors are not likely to be treated with a “surprise” announcement that the ECB is going to expand its purchases of distressed European debt. Any significant ECB intervention would likely follow a formal revision of EU treaties that trades greater ECB flexibility in return for more centralized fiscal control.
He goes on to identify three reasons why it wouldn’t work even if they did try.
- It won’t solve the underlying problem. “The key problem is this. It would seem easy for the ECB to address immediate liquidity concerns by buying distressed European sovereign debt. But if the ECB buys those bonds, and they don’t pay off over the long-term, the ECB will have given a fiscal subsidy to those distressed countries, and Germany will end up bearing most of the cost.”
- It would create legal problems: “Article 105: “The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 [European economic and social progress, identity, freedom, security and justice]. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 4 [EU political and development guidelines provided by the European Council].””
- It would create raging inflation. “Against this backdrop, consider a situation where the European Central Bank begins to print new euros in order to purchase the debt of distressed European countries that are deeply indebted and likely to become more so (barring a major restructuring of their existing obligations). In this case, would people be likely to view the newly created euros as temporary or permanent? Would people be likely to seek the euro as a “safe haven,” or would they seek the relative safety of some other currency? For my part, I am convinced that a move to buy distressed European debt by creating euros would be seen as permanent money creation, and that far from seeing any safe-haven demand for euros, we would instead see a flight from the euro. As a result, European inflation would predictably accelerate. “