Monetary experts fear that the law of diminishing returns for quantitative easing is setting in and that ever-more extreme measures by central banks are creating insidious new risks.
The side effects of the medicine are getting stronger and stronger: the curative effects are getting weaker and weaker
Axel Weber, former Bundesbank chief and now head of UBS
Axel Weber, the former Bundesbank chief and now head of UBS, said the balance of advantage had already turned negative. “There is a very clear limit to what the ECB can achieve. The problem is that monetary policy has largely run its course,” he said in Davos.
“The side effects of the medicine are getting stronger and stronger: the curative effects are getting weaker and weaker,” he said, adding that the current turmoil in the markets is the first taste of the hangover, evidence of the price we may have to pay.
Mr Weber said the ECB was likely to keep pushing interest rates deeper in negative territory but this could backfire: “There is a big risk that it may actually drive cash out of the economy.”
It could turn out to be the largest public expenditure we’ve had for a number of years. Our society will be changed by this. In which direction, we can only guess
Mario Draghi on the refugee crisis in Europe
Benoit Coeure, France’s member of the ECB executive, insisted that the latest stimulus measures have been a success. “QE is working. We’ve seen a tremendous improvement on European capital markets. Borrowing costs for companies have come down by 80 basis points, and 140 points for Italy,” he said.
“We’re mindful of the consequences of monetary policy. But we’re not going to have a conversation next month on tapering or exiting the low-rates policy because that is in the best interest of Europe.”
Mr Draghi said a mix of monetary stimulus, cheap oil, and the end of fiscal austerity was finally powering a lasting pick-up in European growth. “All these drivers should ensure a continuation of the recovery. I don’t think there is any reason to think things have changed,” he said.
The great unknown is whether the refugee crisis mushrooms out of control and further destroys confidence in Europe, or whether it acts as a ‘positive economic shock’ and a catalyst for change.
“It could turn out to be the largest public expenditure we’ve had for a number of years. Our society will be changed by this. In which direction, we can only guess,” he said.
There are already signs of a tectonic shift. Wolfgang Schauble, Germany’s finance minister, called for a multi-billion euro “Marshall Plan” to blanket the North Africa and most vulnerable areas of the Middle East with investment.
He also called for a “coalition of the willing” to confront the migrant crisis head on before it causes the European project to unravel. “We can no longer wait for Brussels,” he said.
Hedge fund veteran George Soros said it was clear that Mr Draghi had finally secured the backing of the German Bundesbank for further action as the emerging market crisis deepened, paving the way for an expansion of quantitative easing in March. A German-led bloc of hawks called into question the whole strategy of QE at a meeting in December, citing the rapid growth of the eurozone money supply, but the commodity crash and the perceived tremors from China have since washed over their objections.
Yet the debate over QE within policy circles is heating up. Some experts even warn that extreme measures could undermine faith in the authorities themselves, which would have alarming implications.
Alfonso Prat-Gay, Argentina’s finance minister and former central bank governor, warned that the rescuers are becoming part of the global debt problem. “Central bank debt has risen by 30 percentage points of global GDP. This is a massive increase,” he said.
Central bankers like to joke that they control a limitless printing press, but they do not know for sure whether it is true or just a bluff.