One comment from Mario Draghi at his European Central Bank (ECB) press conference that was passed over in coverage last week was when he described "the present regulation" as "one of the major impediments" when asked about the Bank's plans for Quantitative Easing (QE) and the preparations for it. "Having said that," Draghi continued, "no matter what regulators will be doing, we want to be ready. And that's why we've intensified preparation."
With this one comment, Mario Draghi reminded everyone gathered in Frankfurt and listening in around the world that it is not the ECB's decision as to whether to go ahead with asset purchases. Firstly, Eurogroup leaders would have to vote on it. Previously, Germany's constitutional court has ruled that the ECB's Outright Monetary Transactions (OMT) programme, designed to support bond markets of troubled Eurozone states but never deployed, exceeded the central bank's powers and remit. If OMT is illegal under the ECB's constitution, then QE most certainly would be and getting around that would take some wrangling. It's needed quickly and data released this week could have given it the impetus.
GDP in the Eurozone in the second quarter stagnated. In July, we also saw CPI fall by 0.7% on the month. Both of these figures are horrific and taken together in context, present a very grim picture of the Eurozone economy. The lead-in from the situation in Russia has not been particularly helpful and almost guarantees that any rebound will not be a quick one. With German GDP falling into negative territory for the first time since 2012, France stagnating and last week's news of an Italian recession we now have over two thirds of the Eurozone economy either in recession, three months away from it or simply stagnating.
Put together with outright deflation on a month on month basis, the economic need for additional measures for the Eurozone economy is clear for us to see. We must hope that politicians see it the same way.
There are, of course, questions that must be addressed by any plans for bond purchases. Similar plans in the UK, US and Japan have only had the need to purchase one country's debt; the Bank of England bought gilts, the Fed bought treasuries and the Bank of Japan bought JGBs. The European Central Bank must buy 18 different bonds in amounts that are in proportion to the economies' importance within the Eurozone. For the AAA rated debt of Finland and Germany this would matter little but for peripheral nations such as Greece, Cyprus, Portugal and Spain this support may challenge the need to make long-term structural amendments. Would an ECB sell its holdings of a country's debt if an election put an anti-austerity party in power as is possible in Greece or Italy?
Such was the rush to bring about a common currency area that these rather existential questions were not considered at the time. The European Central Bank has brought in a consultant to help them with the plan. While Draghi would not be drawn on whether this constituted that asset purchases were a case of "when and not if", we must think that the moment has come for a reaction in the monetary policy landscape.