With Luck And Slight Of Hand, Draghi Restarts Quantitative Easing At European Central Bank

If it had come to a formal vote, there’s a good chance that European Central Bank President Mario Draghi would have faced defeat in his efforts to revive quantitative easing at the central bank.

But the bank doesn’t usually hold a formal vote on a issue like this and by luck administrative rules removed the votes of two of his biggest critics (anyway), and the outgoing bank president had built up enough prestige to carry the day.

Starting on November 1 the European Central Bank will buy bonds at a rate of 20 billion euros ($22 billion) a month for as long as necessary to hit its 2% inflation goal. (With trends in inflation being what they are, they means the central bank committed to bond purchases “forever.) In an effort to preserve some degree of profits at banks–it’s hard to make money if you pay borrowers to take out loans–the ECB granted lenders an exemption from negative rates for some of their deposits.

Oh, and the bank, as expected, reduced its deposit rate to a minus 0.5% from the previous 0.4%.

The stiff degree of opposition came from Germany and the Netherlands as expected. But France crossed over to oppose quantitative easing too at this time. Those three countries mean the opposition to the measure represented about half of the GDP of the EuroZone. Add in opposition from Estonia and Austria and the no votes, if there had been a formal vote, represented a majority of GDP. (The bank’s rules of rotation mean that France and Estonia do not have votes currently.)

The size of the opposition and the lack of a formal vote pose a real problem for in-coming European Central Bank President Christine Lagarde (especially since “her country” France opposed the decision.)

In all honesty Draghi simply declared that his position had a majority and the President’s clout carried that opinion without challenge. Lagarde won’t have the authority to simply declare her position the winner.

European bonds that had initially rallied on the news gave back much of their gains as details emerged. The euro, which had retreated on the news, reversed direction to recover its losses.