(Bloomberg Opinion) -- BlackRock Inc., the world’s largest money manager, made several changes among its senior executives earlier this month. Among them: Rick Rieder was added as a lead portfolio manager for the firm’s Global Allocation Fund in addition to his role as global chief investment officer of fixed income.
Days later, he appeared to send shockwaves across Wall Street with a suggestion that the European Central Bank should consider buying stocks as a form of additional stimulus rather than sticking to the playbook of purchasing debt only. Just as he’s looking beyond just bonds for his new fund, Rieder thinks Mario Draghi and his successor should consider doing the same.
He laid out his reasoning to Bloomberg TV’s Jonathan Ferro, and to me again in a phone interview. By Rieder’s logic, the ECB has done all that it can to reduce the cost of debt for European companies — in fact, hundreds of billions of dollars of the region’s corporate debt now trades with negative yields. Doing more of the same isn’t likely to stimulate growth in an economy that’s already highly leveraged. However, the cost of financing companies through equity is far higher within the area than it is in the U.S. A simple chart of the Euro Stoxx 50 Index and the Dow Jones Industrial Average, which both track a selection of blue-chip stocks that represent sector leaders, shows just how far behind Europe has fallen:
Rieder envisions a system in which the ECB teams up with regional governments so the central bank’s investments are used primarily to finance technological advancements in industries like energy, health care and transportation. He sees it as damning that so few of the world’s largest “unicorns” are based in Europe. That could start to change if the ECB switched its focus to equity purchases instead of debt.
Accepting this premise first requires acknowledging that central banks will likely forever be involved in tinkering with capital markets and that their efforts to stimulate growth in the years to come will require increasingly unconventional policies. That’s understandably hard for some investors to embrace. If the ECB bought stocks, “that would basically signal to me that, again, we are at the end of the world,” said Krishna Memani of OppenheimerFunds Inc. And yet the Bank of Japan has been purchasing exchange-traded funds for years. Few economists see that winding down soon.
In that sense, the idea of the ECB purchasing stocks isn’t that unique. The potentially more significant consequence is what such a policy would mean for the European Union itself.
The EU, probably more than any other political body, has to deal with complicated issues of sovereignty and national identity. Without a powerful central government, no one party can juice the economy with fiscal stimulus. The arrangement also makes it tougher for monolingual workers to seek employment in other countries, which might help explain how German unemployment is the lowest in at least 28 years, while Italy and Spain’s jobless rates remain in the double digits. And, crucially, the euro’s status as a common currency for all EU nations means there’s no exchange-rate flexibility. That makes it difficult for the so-called peripheral countries with weaker economies to stay competitive in terms of trade.
The ECB carries a heavy burden as the only entity that can realistically attempt to spread the wealth with bold, wide-reaching policy. It has tried to do that by suppressing sovereign interest rates. Rieder is right to point out that the bank’s policies aren’t as effective anymore and that it needs to embark on a new path to seriously boost the overall economy.
What happens, though, if the ECB does decide to buy stock and it still fails to encourage innovation and investment? That would raise questions about the central bank’s ability to encourage growth and perhaps even cast doubt on the viability of the EU itself, which in relative terms is still in its infancy. On top of that, Draghi will soon be giving up what my Bloomberg Opinion colleague Ferdinando Giugliano called “the world’s hardest job.” “The daunting question facing the euro zone is whether a more ordinary president can be strong enough to hold together the fractious monetary union,” he wrote, noting how Draghi has managed to build broad political support for his policies and keep the ECB above the fray of national squabbles.
Ultimately, buying equities seems like a reasonable next step for Draghi or his successor. European companies have lagged behind for long enough that the benefits of stock purchases should show up in the form of increased hiring and improving consumer confidence. That’s very different from U.S. companies, which are buying back shares because they can’t seem to come up with more productive ways to use their money. The EU needs some momentum, and that won’t come from anywhere but the ECB. That means the central bank will need to do whatever it takes.
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Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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