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Why Europe Resists Printing Euros

Carter Dougherty|The New York Times
Wednesday, 25 Mar 2009 | 4:53 AM ET

At the European Central Bank, being a maverick means holding steady as others bow to the prevailing winds.

As its peers in the United States, Britain and Japan crank up monetary printing presses in a bid to prop up their economies, the European bank is resisting the rush to adopt those banking policies.

The European approach, to many outsiders and even some politicians like Nicolas Sarkozy, the president of France, is hopelessly myopic and likely to leave Europe struggling long after others have resumed growth. But it has become the signature approach of the European Central Bank since credit markets first tightened in August 2007 to consider, before tearing up the rule book, not only the crisis of the moment but what comes later.

“Exaggerated swings without perspective,” the central bank president, Jean-Claude Trichet, said recently, “would delay the return of sustainable prosperity because they would undermine confidence, which is the most precious ingredient in the current circumstances.”

When others sharply cut interest rates, the European bank was slower to act. When others stepped in to bail out financial institutions, the European bank, constitutionally limited in its powers, left that to national governments.

And now, with other central banks acting to create money out of thin air because they cannot prime the lending pumps by lowering short-term interest rates any further, the European bank remains wary of the specter of inflation.

Beneath it all is an aversion to anything that smacks of “printing money,” a phrase that evokes Europe’s worst economic nightmares, everything from kings debasing their currencies to fight endless wars to the hyperinflation and currency collapses in Germany after it lost two wars in the 20th century.

But in the view of its critics, the European bank is underestimating the dangerous and unpredictable dynamics of the recession. With the risk of being caught in a downward spiral, they say, the European bank should be actively pushing cash into the economy now, as the Federal Reserve, the Bank of England and the Bank of Japan are all doing.

“What they are doing is simply not enough, and this is not one of those downturns that you simply work your way through,” said Kenneth Wattret, chief euro zone economist at BNP Paribas in London.

Another danger for the European bank, economists said, is that policies in Washington and London put pressure on the euro by means of the exchange rate.

The euro has climbed about 10 percent against the dollar since the Fed policy was announced, the logical consequence of a decision to increase the supply of dollars. It is also up sharply against the pound.

A sustained strengthening of the euro would price more European exports out of world markets as they recover, giving the American economy a significant leg up without any overt decision to devalue the dollar.

“You can’t suddenly start engaging in competitive devaluations of your currency,” said Erik Nielsen, chief Europe economist at Goldman Sachs. “But you can loosen monetary policy domestically, which has the same effect.”

With the European bank’s benchmark interest rate at 1.5 percent, and probably headed lower, the overarching economic policy question in Europe has been whether the central bank in Frankfurt will join the worldwide move to buy financial assets — whether private bonds or government debt — as interest rates near zero. This policy is known as quantitative easing.

The European bank has not ruled out such an effort, as Mr. Trichet has been careful to say repeatedly. For several reasons, though — some of them institutional but others deeply buried in European culture and history — it is reluctant to emulate its peers.

The European bank is likely to lower interest rates further at its next meeting on April 2, most analysts believe, having overcome qualms about pushing borrowing costs close to zero. And top officials have been hinting that the bank would also extend the length of loans it offered banks as part of its normal operations to ensure they did not get caught short of cash.

But the bank has thus far avoided anything resembling the Fed’s advocacy, which is viewed in Frankfurt as a desperate effort to make up for the lack of political will to fix the American banking system.

The Fed is trying everything it can think of to infuse cash into the economy, bypassing the dormant financial system that is the gatekeeper of credit in normal times. It has bought a wide array of securities, including government bonds whose rates influence lending costs throughout the economy. That is only necessary, in the view of some European officials, because repeated plans to revamp the banking system have failed.

Whether the latest plan, presented by Treasury Secretary Timothy F. Geithner on Monday, will fare any better remains an open question.

Mr. Trichet, though avoiding public criticism of the Fed and the Treasury, has said he is “deeply impressed” by European plans to recapitalize the banking system and guarantee certain transactions.

European bank officials also often argue that the financial system in Europe is sufficiently different from that in the United States to undermine the effectiveness of quantitative easing.

About two-thirds of the credit in Europe is extended via bank loans, with the rest coming from debt securities. In the United States, banks account for roughly a third of lending, giving the Fed reason to believe it can help by buying up securities.

The European bank does not deny that Europe faces a painfully deep recession.

But Europe, particularly Germany where the central bank is based, is still a place where the fear of inflation is never far from the surface, even as economists debate whether prices will fall or merely hold steady.

“It could be fatal for the euro’s credibility to have the E.C.B. simply start printing money,” said Julian Callow, chief Europe economist at Barclays Capital in London. “It’s too much to ask of a currency that is not even a teenager yet.”

Contact Europe: Economy

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