A dereliction of duty by the European Central Bank?

The Governor of the Bank of England, Sir Mervyn King, said in August that the European Central Bank “has gone to the outer limits of what a central bank can do” in its attempts to stabilise the eurozone.

But is that actually true? These charts, courtesy of Berenberg Bank, suggest that, compared to the US Federal Reserve and Sir Mervyn’s own Bank of England, the ECB has been sitting on its hands.

This chart shows the three central banks’ purchases of sovereign bonds and mortgage-backed securities in relation to the total GDP of their various jurisdictions:

The ECB is clearly lagging well behind on this measure.

Real interest rates are also considerably higher in the eurozone area than they are in the US and the UK:

The Belgian economist Paul De Grauwe argues that the reason Italy (which has a relatively small fiscal deficit) is being shunned by the debt markets, whereas the long-term borrowing rates of the UK (where we still have a double digit deficit) are at record lows, is that we have a central bank that will print enough money to ensure that creditors are paid.

Despite the fulminations of the inflation nutters, investors prefer the risk that they will be paid back in a somewhat depreciated currency to the risk of not getting paid back at all (which is what would happen if a state is forced into default).

If this analysis is correct then what’s really plunging the eurozone into fresh hells, week after week,  is the stubborn conservatism of the European Central Bank. The ECB’s new president, Mario Draghi, (right) will hold his first press conference tomorrow. That should give us some indication whether he is as stubbornly conservative as his predecessor, Jean-Claude Trichet.

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• CurtOntheRadio

  Meaning, what?   

  I would imagine the ECB is legally prevented from doing more; it’s rigidly constitutionally a very conservative and monetarist institution, isn’t it?

• barabu

  This is the issue that allows Cameron to get away with nonesense about why bond yields are low here while they are three times as big in Italy when that country’s deficts are lower than ours. Having control of your own currency and issuing debt in that currency is almost a guarantee that your bonds will be seen as a save haven in bad times, obviously. This is a story that needs to be told so that Cameron doesn’t carry on telling us lies about it.