Quasi-Fiscal Policy—The ECB’s Corporate Bond Purchases
Eight years after the financial crisis, the European economy is still not where it wants to be. Growth remains slack and the European Union seems to be diverging rather than consolidating—economically as well as politically. In one of the most recent attempts to promote growth and stimulate the real economy to expand investments, the European Central Bank (ECB) launched its Corporate Sector Purchase Program (CSPP), through which it directly purchases corporate bonds.
The choice to buy corporate bonds rather than promote direct investment through fiscal policy is a reminder of the lack of fiscal architecture in the EU. This shortcoming, which prevents an overarching fiscal policy, leads to a sort of quasi-fiscal policy by the only tool available: monetary policy. In the CSPP program, central banks provide direct liquidity to investment-grade corporations through bond purchases. However, the use of the funds is ultimately left to the discretion of the corporations. (There is no control over the impact of the stimulus, for example.) Given the continued monetary easing and the unknown impact of the variety of policy tools being used, it remains unclear whether companies actually need additional financing through central banks—and whether that is the best approach to economic stimulus.
The first part of the question concerns the available sources of financing for companies and the price they must pay for new capital. A major part of an economy’s growth comes from corporations, but they lack the funds to finance their ongoing operations and expansions.[i] Therefore, it is an essential task of policymakers to ensure that corporations receive that financing, to provide economic growth and create jobs. In Europe, the main source of financing is bank loans; Europe’s small businesses receive more than 75 percent of their financing this way.[ii] Capital provision through increased liquidity has been the main focus of monetary policy since the financial crisis and has resulted in reserves well in excess of $2 trillion at the ECB. By boosting available reserves, central banks are able to directly influence short-term interest rates not only between banks, but for many market participants as well, as these rates are the basis for many other short-term rates. Driven by the expansionary monetary policy of the past eight years, the average interest rates for nonfinancial corporate loans have steadily decreased, to between 1.65% and 1.79% in June 2016. With rates so low, the notion that financing conditions are an obstacle to investment is dubious.
Source: European Central Bank
The second part of the question is much harder to answer, as we will not know until after the fact whether a policy achieved its desired effect. Given the low financing costs, it seems unlikely CSPP will spur corporate investment and boost real economic growth, especially in the current high-debt environment.[iii] As we have argued frequently in the past, what’s needed most is structural change and the expansion of financing sources in the current economic environment, and to refrain from viewing monetary policy as omnipotent.
In recent years, quantitative easing has been applied in many forms in the world’s biggest economies, and while the first impact helped to prevent a furthering of a post-crisis recession, it has become clear that the effects are fading. Japan is a prime example of the struggles that prolonged monetary stimulus can cause and the vicious feedback loop that it generates with financial markets. Japan’s government bonds just witnessed one of their worst selloffs in years as investors grew worried about a possible cutback in further expansionary stimulus. In times of negative interest rates and government bond yields, the continued monetary stimulus becomes a main driver of the market, something that should not become the long-term norm. Monetary policy should be considered an adrenaline injection, not a daily aspirin.
CSPP is unlikely to induce enough economic growth for it to be called a policy success. The ECB, along with the European Commission, should be working on a plan to put an incentive structure in place to diversify and strengthen financial markets and investments. This underlines the importance of the Capital Markets Union, a project that has become a cornerstone of furthering financial integration across the EU. Its main goal is to provide corporations and investment projects with the whole spectrum of financing sources—private equity and market-based.[iv] This will help incentivize investment into smaller, innovative companies across Europe while improving the resilience to future financial shocks. This will not be an easy task, but it may well be the only viable choice.
[ii] European Commission (August 2016).
[iii] Nickel and Tudyka: “Fiscal Stimulus in Times of High Debt,” ECB Working Paper (2013).
[iv] European Commission, “Capital Markets Union Action Plan.”