Proposals

#2 Decrease or stop quantitative easing

The European Central Bank’s (ECB) quantitative easing (QE) programme was supposed to be a temporary emergency measure to fight the financial crises. Yet 12 years after the 2008 financial crisis, it is still ongoing without a clear end date in sight. How long can the programme last? Is there a limit to the actions which the ECB can take? And how can the central bank continue adopting such unconventional measures without risking legal challenges?

Some propose to end the programme as soon as possible because it has brought down borrowing costs for banks and the private sector. They fear that more QE will only contribute to increasing government debt, hurt savers through low interest rates, and increased asset prices (including housing prices). Moreover, since the ECB’s current QE programmes do not take into account climate criteria, it ends up financing carbon intensive industries and thereby has a negative impact on the climate.

Others argue that stopping or decreasing QE is dangerous because it will cut the lifeline for the public and private sector in a period of prolonged financial instability, especially during the Covid-19 pandemic and in its aftermath.

➕ Pros

• This approach would signify a return to the central banks initial role of setting interest rates to control inflation rates.
• Return to a time where banks borrow from each other and a healthy financial system is not entirely dependent on QE.
• No more legal challenges to the ECB’s independence or actions due to the ECB’s unconventional actions.
• Some inefficient, unprofitable banks and businesses currently relying on QE will go out of business, ensuring a dynamic creative destruction process (a process where the inefficient firms exit the market and enable the entry of new, innovative and more competitive ones).
• Reducing the ECB’s current QE programmes would also reduce financing for carbon intensive sectors.

➖ Cons

• Sudden stop of QE will create a panic and potential crisis in the financial markets,  making it expensive to borrow both for governments and the private sector.
• When borrowing becomes expensive, governments may face a debt crisis and resort to austerity policies such as cutting spending and increasing taxes.
• Banks may reduce how much they lend, making it more expensive to access credit.
• Stopping QE during the Covid-19 pandemic and immediate aftermath may create a deeper and longer-lasting recession.