ECB's Bini Smaghi opens door to euro zone QE debate

The European Central Bank should launch a US-style asset purchase programme if economic conditions change, executive board member Lorenzo Bini Smaghi said, opening the door to a possible policy shift at the bank to combat deflation.

Bini Smaghi, who steps down from the ECB next week, told the Financial Times on Friday that, if required, "I would see no reason why such an instrument tailor-made for specific characteristics of the euro area should not be used."

Quantitative easing would be appropriate "if ...in particular in countries facing a liquidity trap that may lead to deflation," he told the newspaper.
So far, the ECB sees no risk of deflation.

With no end in sight to the euro zone debt crisis, pressure is growing on the ECB to deploy similar crisis-fighting tools as its peers in Britain or the United States, but the bank - supported by Germany - has steadfastly resisted.

"This is the first time I have heard such a comment from the ECB," Christian Schulz, senior economist at Berenberg Bank said. "But he is leaving the ECB soon and he is Italian. There are others who we should pay more attention to."

Kick-starting the economy

The Federal Reserve bought more than USD 2 trillion of Treasuries and other securities with new money to kick-start the US economy in 2008-2010, while the Bank of England relaunched its quantitative easing programme in October.

So far, the ECB has always referred to the fact that its mandate to preserve price stability differs from the Fed's and the BoE's.
That distinction was reaffirmed on Friday by another outgoing policymaker, German Juergen Stark.

"We are learning a lot from markets. But markets also have to learn from us and realise that the US central bank and Wall Street were not a model for Europe, but that Europe has its own traditions and laws," Executive Board member Stark was quoted as saying in German daily Die Welt.
Royal Bank of Scotland economist Nick Matthews said even though Bini Smaghi's comments were less guarded in view of his imminent departure, they were deliberate.

"There is a specific reason why he is delivering this message. It is probably to balance the debate. There are some signs of potential tension in the discussion," Matthews said.

Berenberg's Schulz also said it showed that the ECB is thinking about what to do if deflation became an issue. "And there is a risk, considering the credit crunch that we now see in several countries already," he added.
If the ECB did decided to do QE, it would be more likely to buy corporate and bank bonds rather than government bonds, because this would be less controversial.

The EU treaty prohibits the ECB from funding states directly. Stark also said in his interview that the euro zone should not rely on the International Monetary Fund to solve its debt problems, because doing so was an attempt to circumvent the ban on direct monetary financing in Europe.