Europe’s Central Bank is often cast as one of the pantomime villains of Ireland’s banking crisis. After all, it is the institutional personification of ‘Frankfurt’s Way’. While it is always easiest to blame the outsider, accusations levelled at the ECB are not in this case entirely without foundation. The recent decision by Jean-Claude Trichet – ECB President until late 2011 – to cooperate with Ireland’s banking inquiry is therefore a welcome development.
The ECB has been hitting the headlines for very different reasons of late, and you might be wondering, for once, not what have they done to me lately, but what have they done for me. The big economic news of early 2015 is that the ECB is finally following the lead of the world’s other big central banks with it’s own PPM (programme for printing money), commonly referred to by finance types as QE (quantitative easing). Basically, this means increasing the quantity of euros in the economy, but with the click of a mouse rather than the cranking of printing presses. For the foreseeable future, Frankfurt will create an extra EUR 60bn – roughly EUR 180 per person in the Eurozone – every month. Not to be sniffed at.
Unfortunately, this new money won’t be dropped from a helicopter into your bank account every month. The theory is that more euros in the system will lead to higher prices, higher wages, even lower interest rates, more lending, more exports and stronger growth.
Ok, you might say, but what does that mean for my back pocket?
Firstly, borrowing money should be easier and cheaper. Essentially, the ECB – through the national Central Banks like ours on Dame Street – are creating money out of thin air to buy loans from the banks in the hope that this will encourage them to use that money to create more loans for firms and families at even lower interest rates. However, interest rates are already about as low as they can go and, in Ireland at least, there are more fundamental challenges to deal with like the still-sizeable boom-time debt overhang. On top of that, new rules from Dame Street on the size of deposit you need before you qualify for a mortgage could put a dampener on credit growth, exactly as they are designed to do. Savers will also lose out as interest rates fall even further, and stay lower for longer.
Secondly, because the ECB is using new money to buy banks’ loans, forcing down the interest rates, the profitability of new lending will fall vis-à-vis other investments, like shares and houses. Since everyone in the financial markets knows this, they will bid up the prices of all assets. If you own a house or have a stock portfolio, this is good news. Indeed, you are supposed to feel richer, so that you are more inclined to buy a new car, build an extension to your house or splash out in the sales. Economists call it the ‘wealth effect’. Of course, the fewer assets you have, the less you gain.
Thirdly, the euro currency will continue to weaken. Not great if you’re planning holidays outside the Eurozone, but fantastic for our exporters. While the big multinationals are not as sensitive to currency movements, smaller indigenous exporters rely more on the UK and US markets than do those in continental Eurozone economies. They will be more competitive, sell more of their products, and hire more workers to meet the increased demand. On the downside, the price of many imported consumer goods will rise, and the full benefit of falling oil prices will not feed through to prices at the pump.
And what does it mean for the age of austerity? All else being equal, the PPM should see interest rates on new Irish Government debt remain lower than would otherwise be the case, helping keep a lid on the hefty annual interest bill (EUR 7.5bn in 2014). So, that should give the government a little more margin for manoeuvre to ‘give something back’ before the election. If the PPM is successful, however, prices of everyday goods will rise. This puts an onus on government, therefore, to ensure those on low and fixed incomes get more money in their back pocket to match the increased cost-of-living.
But, this all sounds a lot like the sort of trickle-down economics we’ve heard so much about in the past, right? The rich getting richer, and everyone else getting relatively poorer? Precisely.