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The ECB’s Beggar-thy-Trump Strategy

The European Central Bank's decision to cut interest rates still further and launch another round of quantitative easing raises serious concerns about its internal decision-making process. The ECB is pursuing an exchange-rate policy in all but name, thus putting Europe on a collision course with the Trump administration.

MUNICH – On September 12, the European Central Bank decided to launch yet another asset-purchase program, with plans to buy €20 billion ($22 billion) in new securities per month for an indefinite period of time, using the same structure as it has in the past. The decision was not made unanimously: the German, French, Dutch, Austrian, and Estonian members of the ECB council have all voiced fierce opposition to further quantitative easing (QE).

ECB President Mario Draghi claims that the majority in favor of further loosening was so large that it was unnecessary even to count the votes. Never mind that the countries opposing the decision hold 56% of the ECB’s paid-in equity capital and account for 60% of eurozone output. Counting their compatriots on the ECB Governing Council, however, they have only seven out of 25 potential votes (subject to a rotating limitation). Draghi did have a majority, then, but it represented a very clear minority of the ECB’s liable capital. This raises considerable concerns about the Governing Council’s decision-making process.

Such concerns are all the more justified considering that US President Donald Trump has been complaining loudly about the implied exchange-rate policy stemming from ECB asset purchases. He has a point. Draghi, of course, insists that the ECB does not “target” the exchange rate. While that may be true, it is beside the point. By purchasing long-term securities, eurozone central banks will once again trigger a currency devaluation. Indeed, it is precisely this effect that likely plays the dominant role in stimulating economic activity.

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