Draghi, Letta: All Eurozone countries must be able to borrow like Germany

Mario Draghi, President of the European Central Bank (on the left) and Ollie Rehn, Vice President of European Commission, responsible for financial affairs and the euro. (EC Audiovisual Services).

Mario Draghi, President of the European Central Bank (on the left) and Ollie Rehn, Vice President of European Commission, responsible for financial affairs and the euro. (EC Audiovisual Services).

The reduction of European Central Bank’s basic rate from 0.75% to 0.5 % was the less important news from Bratislava, Slovakia, yesterday where the governor of the central bank, Mario Draghi, presented the decisions of the bank’s Governing Council and answered questions from journalists. Not even the possibility of a new interest rate cut soon was of much importance in what Draghi said. This last prospect also has been discounted by markets.

The European Sting had not only predicted yesterday’s interest rate cut, but had commented that historically it was the first time that the ECB had almost pre-announced it. The strong dynamic in this affair could not be consumed in a quarter unit interest rate cut and seemingly there will be a new one soon.

However all that are of less importance compared to what Draghi had to say about the real economy and the role of ECB. Diverging strongly from the German tradition of Bundesbank, Draghi expressed a strong interest for the countries under stress and the Small and Medium Enterprises (SMEs). Bundesbank’s influence on ECB had up to now restricted and almost immunised central bank’s action from real economy issues, focusing it exclusively on monetary and financial markets. Now Draghi shows a vivid interest in real economy and its backbone, the small and medium-sized enterprises (SMEs).

Focus on the real economy

His comment on that was very characteristic. He said “The recent Bank Lending Survey (BLS) confirmed weak demand for loans in the euro area. While some signs of stabilisation are emerging, the Survey on the access to finance of  (SMEs) in the euro area indicates continued tight credit conditions, particularly for SMEs in several euro area countries. Moreover, the available information indicates high risk perception on the part of banks”.

After the SMEs, Draghi went on showing a vivid interest for the countries under stress. He said that, “In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs. Further decisive steps for establishing a banking union will help to accomplish this objective”. Let’s analyse all that.

ECB’s policy out of frame

There are two points of interest in what Draghi said. First he observes that there are “continued tight credit conditions particularly for SMEs in several euro area countries”. Unquestionably he means that the SMEs in stressed Eurozone countries like Italy, Greece, Spain, Portugal, Ireland and elsewhere are being starved of financial support because banks avoid taking more such risks. In view of that he says, “In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed”.

Given that Ollie Rehn, the vice President of the European Commission, was present yesterday in the Bratislava meeting of ECB’s governing Council, Draghi in this above quote goes as far as to make political policy proposals, that only Rehn is competent to   formulate. This Commissioner however speaking in the European Parliament last week acknowledged that there is now a pressing need for more growth measures to be applied in Eurozone. It was the first time that Rehn, the architect of the severe austerity programmes, spoke of relaxation. Seemingly Draghi got the message and wanted to give financial substance to Rehn’s opening of a new policy horizon.

In short Draghi concluded that the fragmentation of Eurozone’s financial market must be effectively addressed, in order ECB’s policy of cheap money to reach everybody and the resilience of peripheral banks be strengthened. Those are not easy tasks though. In order to support the resilience of peripheral banks so as they can take care of the financial needs and the risks of the SMEs, there is only one way to do it; recapitalise the lenders adequately. As for the defragmentation of Eurozone’s financial markets this is an even more difficult task because it presupposes the successful application of the governments programmes towards zeroing their fiscal deficits.

Letta plus Draghi

Try to recall what the new Italian Prime Minister, Enrico Letta, said to German Chancellor Angela Merkel, about the target of running a balanced budget in Italy. He said that this is more or less destined to happen next year given as it is foreseen by the Constitution. In reality the same is true for Greece and Ireland. Letta is worried though about what is to follow after the zeroing of fiscal deficits. Then what?

The consolidation of the government budgets does not mean necessarily that the national peripheral financial markets will start automatically working like Frankfurt or Paris, lending money to SMEs at comparable interest rates as in Germany in a unified Eurozone financial market. As a matter of fact Draghi came to answer that, knowing very well that in order to defragment Eurozone’s financial markets and strengthen the resilience of the peripheral banks they have first to be recapitalised.

This can be done either by public means like the EFSF/ESM or the markets. But in order to arrive at a situation where the world markets will start again trusting the Greek and the Portuguese banks, the ECB must guarantee the trustworthiness of those peripheral lenders. This will be done under the new ECB’s role of supervisor of Eurozone’s banking system, in the environment of the Banking Union. Then Draghi made another revelation by saying that, “the Governing Council emphasises that the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation”.

This is exactly what Letta asked for in Berlin and Paris; the enactment of the Banking Union the soonest possible. In reality Draghi arrived at the same conclusion with the new Italian Premier or possibly the other way around. The fact remains that from now on the ECB, under Mario Draghi, will push hard towards enacting the Banking Union and help the peripheral countries regain what they had until 2008; borrowing at the same interest rates as Germany.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the sting Milestone

Featured Stings

These campaigners want to give a quarter of the UK back to nature

Can we feed everyone without unleashing disaster? Read on

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

German and French bankers looted the Irish and Spanish unemployed

Political solution ‘long overdue’ to protect the children of eastern Ukraine

Horn of Africa: UN chief welcomes Djibouti agreement between Eritrea, Ethiopia and Somalia

These five exercise trends will help society and your health

Health privatization to blame for health inequality or poor investment in public health?

Why sustainable products are a win-win for all of us

How banking with blockchain can stamp out corruption and increase financial inclusion

Ensure safety of responders UN Security Council urges, amid worsening DR Congo Ebola outbreak

Mental health and suicide prevention: why focus on primary care

For how long and at what cost can the ECB continue printing trillions to keep euro area going?

Sardinia’s La Pelosa beach is charging tourists an entry fee to protect its dunes and vegetation

CLIMATE CHANGE FOCUS: Climate-proofing Timor-Leste

COP21 Business update: Companies urge now for carbon pricing as coal is still a big issue

Young people meet in Malta to shape the future of Europe

How Sierra Leone is using 3D printing to become a model state

American negotiators can’t pay for their trip to Brussels, EU-US trade agreement freezes

ITU Telecom World 2019 will take place on 9-12 September in Budapest, Hungary

Here’s how tech can help governments fight corruption

Juncker’s Investment Plan in desperate need for trust and funds from public and private investors

The global suicide rate is growing – what can we do?

JADE Spring Conference 2018 is on its way: Young entrepreneurs gather in Brussels to shape Europe

Yemen: Tackling the world’s largest humanitarian crisis

Turkey caught in a vicious Syrian circle bringing terror and war at home

How much more political is the new EU leadership? Does this include personal bend?

Scaling for success: SMEs, tech innovations and the ITU Telecom World Awards 2019, in association with The European Sting

These countries are home to the highest proportion of refugees in the world

Activist Greta Thunberg gets preview of UNHQ ahead of climate summit

Working together to end the AIDS-HIV pandemic

Getting vaccinated should just be considered a human right?

Why the financial scandals multiply?

80 adolescents a day will still die of AIDS by 2030, despite slowdown in epidemic

Beyond self-regulation: dealing with Europe’s consumption problem

Can free trade deliver cheaper renewable energy? Ask Mexico

EP President at the European Youth Event: “Your ideas are key in shaping EU’s future”

Japan must urgently address long-standing concerns over foreign bribery enforcement

Seize the opportunities of digital technology to improve well-being but also address the risks

Telemedicine in medical practices and its contribution to quality and accessibility to care

The West cannot ignore Russia; dazed Germany sitting on the fence

The Eurogroup+ is born to govern the EU Banking Union

Taxation: Commission refers Hungary to the Court for failing to apply the minimum EU excise duty on cigarettes

The EU learns about fishing and banking from tiny Iceland

At Ministerial session, UN regional office in Beirut to focus on technology for sustainable development

Nigeria: Top UN officials say more support needed to ease humanitarian crisis and rebuild lives in conflict-ravaged north-east

Timor-Leste Foreign Minister highlights value of UN in resolving conflicts

Traditional knowledge at ‘core’ of indigenous heritage, and ‘must be protected’, says UN Forum

Counting unemployment in the EU: The real rate comes to anything between 16.1% and 20.6%

Ebola emergency chief decries new attacks on frontline staff, after DR Congo worker death

Forget GDP – for the 21st century we need a modern growth measure

Maduro ‘brings the truth’ about Venezuela to UN Assembly; says he is ready to meet US President Trump

Monday’s Daily Brief: Earth Day, looking for a solution to Libya crisis, focus on indigenous issues, Security Council on Sri Lanka, a high-level visit to Bangladesh

Who cares more about taxpayers? The US by being harsh on major banks or the EU still caressing them?

What happens when you toss your water bottle in the trash?

EU steps up economic partnership with Kenya to boost job creation

How Cameron unwillingly helped Eurozone reunite; the long-term repercussions of two European Council decisions

Davos on Climate Change: citizens demanding more actions while CEOs tried to balance profit with sustainability

The role of students in a migration crisis in Roraima, Brazil

Modern farming is harming the planet. Tech-driven permaculture could heal it

Guterres condemns killing of Bangladeshi peacekeeper in South Sudan, during armed attack on UN convoy

Europe must remember its past to build its future

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s