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A silver bullet for the ECB

The European Quantitative Easing Intermediated Programme (EQUIP)

A proposal by Carlo Bastasin, Lorenzo Bini Smaghi, Marcello Messori, Stefano Micossi, Franco Passacantando, Fabrizio Saccomanni and Gianni Toniolo

The ECB’s dilemma 

The European Central Bank has recently acknowledged the dangers attendant a prolonged period of excessively low inflation in the euro area. ECB board members are adamant that the dangers of low inflation will adversely affect the overall stability of the euro area. Lower-than-expected inflation rates “would increase the real value of debt, slowing down the deleveraging process of borrowers, both public and private. The increase of the debt overhang burden would also be detrimental to debt sustainability and to growth.” 

Against this backdrop of a persistently weak inflation outlook, a slowing growth momentum, and subdued monetary and credit dynamics, the ECB decided to implement a package of measures between June and October to provide further monetary policy accommodation and to support lending to the real economy. However, doubts have grown about the efficacy of conventional monetary policy instruments (LTROs, VLTROs and TLTROs), which rely on demand for credit by the banks and the real economy, in the face of continuously sluggish money and credit dynamics. 

Given the weakness of conventional measures, the size of the Eurosystem balance sheet has attracted the attention of ECB observers. In order to expand its balance, the ECB decided that the liquidity injections through the TLTROs need to be accompanied and reinforced by the ABS (asset-backed securities) and covered bond purchases. The purchase of covered bonds has already started. However the capital market segments targeted by the ECB purchases are not as deep and liquid as their equivalents in other leading economies. 

In this context, it is possible that the ECB finds it necessary to expand its purchases to the wide market of euro-area public securities, resorting to sovereign quantitative easing (QE), i.e. large-scale central bank purchases of government debt.

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