End of Asset Purchase Programme Is Badly Timed

At its meeting today, the Governing Council of the European Central Bank (ECB) officially announced the end of its asset purchase programme at the close of 2018. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW), comments on the ECB’s decision.

“The decision to end extra bond purchases was long overdue and is ultimately badly timed due to the ECB’s long hesitation period. The ECB Governing Council will end its purchases of government bonds at a time when prospects for the Eurozone’s economy are already beginning to worsen at a great pace again. This means that we won’t see a reduction in government bonds in the central bank’s balance sheets in the foreseeable future. It is more likely that with today’s decision the asset purchase programme will only be paused and not abandoned altogether.

Especially after the European Court of Justice’s uncritical backing of the purchase programme, speculation that the programme will be reactivated in 2019 will flare up again with each new blow to the economy. The ECB will have to face the next economic downturn without having any room to manoeuvre in terms of conventional monetary policy. It will therefore be forced to continue to resort to the highly controversial unconventional monetary policy instruments. The boundaries between monetary policy and state financing will continue to blur in the Eurozone. This is a development which only comes to the benefit of populist governments with a large public deficit.”