There is a magnificent saying by the late US psychologist Abraham Maslow: "if the only tool you have is a hammer, [it is tempting to treat] everything as if it were a nail." This is how I currently interpret some of the critiques and expectations after the European Central Bank (ECB) finally decided to ease its monetary policy on 5 June.
Readers of my column know that I am not a big fan of the way European monetary policy has been conducted in the last couple of months. Although the ECB finally made the decision to ease, in my view it came too late – and in any case only after lower inflation figures surprised the ECB and the vast majority of economic forecasters in six out of the past eight months. It is still too early for this to qualify as deflation. However, the issue is too serious to be taken as lightly and dismissively as the ECB seemed to be doing until last week.
Now it has reacted. Better late than never, and moreover, it came out with a rather impressive battery of instruments. In particular, it is targeting one of the most important issues in Europe, and especially in its periphery: banks' unwillingness to lend to the broader public and to small and medium enterprises. One of the new measures, the decision not to sterilize the 165 billion euros left in the Securities Markets Programs, can be seen as a first small step in the direction of quantitative easing, but the ECB stopped short of using this big hammer. And that is exactly what disappointed many economists and ECB observers.
Nonetheless, although it is not our central scenario, the likelihood of full-blown QE over the next 12 months is 40%. If long-term inflation expectations become unanchored and inflation stays under 1%, this could trigger QE. Even ECB President Mario Draghi was candid enough by the end of the press conference last week to acknowledge this: "Are we finished? The answer is no. We aren't finished here."
However, the cry for QE, while likely justified, leaves me a little bit queasy. It is true that so far it has served the US well, unless you start to question whether the country's ultra-lax monetary policy is really what caused the recovery there in the first place. Indeed, economists, like everyone else, tend to fall prey to the cognitive flaws of self-serving biases. In a nutshell, people – and by extension, institutions – tend to attribute their successes to their own positive characteristics, but attribute their failures to external factors.
This self-serving bias can explain why former US Federal Reserve Chairmen Alan Greenspan and Ben Bernanke are minimizing their roles in the making of the housing and credit bubbles in 2007–2008. Alan Greenspan has stressed over and over again that too-easy monetary policy "had absolutely nothing to do with the housing bubble," even going as far as calling the idea "ridiculous." Instead, he blames the crisis on external culprits like the "irrational exuberance" of banks and homebuyers and "the worldwide saving glut." But if we believe Greenspan and think this through to the bitter end, then we have to ask why easy monetary policy – and especially QE – would have anything to do with the current US recovery. Is easy monetary policy really so one-sided that it only generates positive outcomes without any side effects?
Don't get me wrong, I am not saying that QE in Europe won't have any positive effects at all. But what (might have) worked in the US is not necessarily reproducible in the Eurozone, where – legal and technical issues aside – the hammer of QE is too big for the region's problems, which need a more targeted approach. In this respect, the ECB's latest decisions should, at least for now, do the trick.