Paris, Washington, IMF against Berlin and ECB on money and interest

Mario Draghi, Governor of ECB and Chairman of the Financial Stability Board, on the left, and Olli Rehn, Member of the EC in charge of Economic and Monetary Affairs, at the conference to strengthen the foundations of integrated and stable financial markets, organised jointly by the EC and ECB. (EC Audiovisual Services).

Inflation in Eurozone is steadily following a downward path for months now, having already reached levels below the ECB benchmark of 2%, being estimated by Eurostat, the EU statistical service, at 1.8% in February. At the same time, the euro area is bound to be announced in technical recession by 31 March, for having recorded negative growth rates in two consecutive quarters. Eurostat said last week that Eurozone lost 0.6% of its GDP during the last quarter of 2012, while most economic analysts are predicting that the negative performance will continue well into the first three-month period of 2013. Yet the European Central Bank (ECB) does nothing.

Any other central bank worthy of its name would have already started making plans for interest rate cuts and liquidity injections to revive the ailing economy. The Bank of Japan has already announced such plans not paying attention if the yen’s parity will plunge.The American central bank, the Fed, is following supportive policies for the real economy all along its long history. Even the most conservative Swiss National Bank has made clear that it will use freely its money printing right, to keep the parity of the Swiss franc at 1.2 with the euro, in order to help the alpine country’s economy going.

Germany controls the ECB?

In short, all central banks almost invariably are accommodating their country’s real economy by appropriate monetary measures like interest rate reductions and liquidity injections. The problem with ECB is that it has no…country, or is it that it is based on German soil and probably cares only for Germany’s economy, neglecting all the rest sixteen nations? The Sting has repeatedly tackled this problem. Last time, it curried an article with this title: “Is ECB helping Germany to buy cheaply the rest of Europe?”

With that article the Sting predicted that the ECB will do nothing this week to alleviate the ailing economies of many Eurozone countries and that the monthly gathering of its governing council, which took place last Thursday 7 February, will change nothing. It turned out to be exactly like that.

Last Tuesday, the Sting wrote: ”Presumably there will be no change of ECB’s main interest rate…Nor any other major policy changes are expected to be announced by Mario Draghi…At the same time, however, all over Eurozone the local financial markets are at boiling point. In Italy, the borrowing cost…oscillates now at three month highs…Cyprus is threatened to be kicked out from the euro…and Greece, Portugal, Spain and Ireland still paying the dearest price for Eurozone’s sovereign debt crisis”.

France, US and IMF agree

Fortunately, the decision not to reduce interest rates was not taken uncontested during last Thursday’s governing council of ECB. Mario Draghi, afterwards, during the traditional Press conference, in answering a journalist’s question, if the decision not to take supportive measures for the real economy, like reduced interest rates, said “yes, we have discussed the possibility of doing it. So, there was discussion. The prevailing consensus was to leave the rates unchanged”.

This is a plain recognition that within the ECB there is an ongoing fight. The two sides are well-shaped. There are those who, guided by France, believe that the central bank is there to help with monetary measures the economies and of all Eurozone member states, and Germany plus Austria and Finland on the other side of the fence believing the opposite. It seems that Berlin insists that ECB is just the continuation of the Bundesbank, the country’s central bank.

It is obvious that the fight between the two sides will continue and the outcome will be some kind of compromise. However, this confrontation between the two Eurozone’s heavyweights is taking world-wide dimensions. Already, the International Monetary Fund, under the influence of Washington has already taken the side of France, for many reasons.

Yesterday, Christine Lagarde, IMF’s general manager speaking from Dublin, came out very strongly, asking the ECB to reduce its interest rates. Lagarde went even further asking the ECB to help Portugal and Ireland to come to markets on their own account. In this way the IMF’s head did not want to leave the slightest doubt, that the IMF and the US are clearly supporting France, in asking relaxed monetary measures from Eurozone’s central bank. Obviously, France and the US are convinced that Germany wants to bring the rest of Eurozone’s countries to their knees, in order to buy their assets cheaply. It’s clear that Paris and Washington are in close cooperation in confronting Germany.