ECB should offer more and cheaper liquidity if Eurozone is to avoid recession

European Central Bank President Mario Draghi (in the foreground) attends a plenary session of the European Parliament in Strasbourg. (EP Audiovisual Services).

European Central Bank President Mario Draghi (in the foreground) attends a plenary session of the European Parliament in Strasbourg. (EP Audiovisual Services).

The fact that monetary policy is the only common policy applied invariably in the 18 still widely diverging Eurozone economies, means that the European Central Bank is the unique euro area institution, which thinks and acts on a really European level. In this respect, the latest statements by its President, Mario Draghi, are quite pertinent. After he recognised that growth in Eurozone is “weak, fragile and uneven”, he reassured everybody that ECB will do its utmost to help euro area’s economy grow again, by keeping its interest rates at their present or lower levels and continue offering abundant liquidity to Eurozone banks.

This first time ever, so detailed and clear ‘forward guidance’ by the ECB obviously means, that in the central bank many people don’t believe Eurozone has abandoned the recession path it followed for the last three years. Consequently the 0.3% increase in Eurozone’s GDP during the second quarter of 2013 may soon be pointing southwards again.

Optimism turns sour

Given the above, the optimism expressed by some European dignitaries in Brussels, after the announcement of a 1% increase in Eurozone’s industrial production in August, may be considered as an exaggeration. For one thing, during July, industrial production had shrunk by another percentage unit. Let alone that on a twelve month base, in August 2013 compared with August 2012, industrial production dropped by 2.1% in the euro area.

Apart from Eurozone’s negative internal economic prospects, any help from the rest of the world, in the form of a rise in demand, should also be considered as highly improbable. After the 17 days shutdown of the administration, the American economy is thought to have lost some of its already weak momentum. As for the developing countries, only China seems to be able to reach the GDP increase target this year, set at 7.5% by Beijing planners. Concerning the rest of the developing countries, IMF economists, Kalpana Kochhar and Roberto Perrelli, in their study entitled, “How Emerging Markets Can Get Their Groove Back”, give a rather frightening response to their own question. They concluded as follows, “we estimate that emerging market’s potential growth needs to be revised down”.

If one adds to all that the problems stemming from the dangerously inadequate capitalisation of Eurozone’s banks, and the consequent reduction of available finance for businesses and households, then the entire euro area looks rather bound to return to recession, than gain a new sustainable growth path. Of course there are more dimensions to euro area’s financial shortcomings.

Saved by liquidity

In view of all those problems ECB cannot stay idle. It is the only institution disposing strong common economic policy tools, targeted invariably on all 18 Eurozone member states. However, this is not the only impetus for ECB to take action. Even its currently applied monetary policy doesn’t reach all member states. The availability of credits and the interest rate cost of bank loans vary largely between member states, to levels that are not justifiable by structural differences. An infallible witness of that is the triple interest rate cost for similar business risks charged by lenders to SMEs in the south, compared to their peers in core Eurozone countries.

This is the famous or rather infamous transmission problem of ECB’s monetary policy, recognised by everybody as a major impediment not only to Eurozone’s integration process, but to achieving even a decimal GDP increase. In short, the cheap and ample liquidity now offered by the ECB doesn’t reach all the member states. Greek, Italian, Spanish, Portuguese and Irish SMEs pay much dearer for the same risks, if finally they come upon a loan offer.

This said, many European economists think that the only way the ECB can react to this adverse conjuncture is to further reduce its basic interest rate and offer more liquidity to Eurozone banks. At this point it must be noted that last year ECB offered more than one trillion in two Long Term Refinancing Operations (LTROs), to the 6,000 lenders of the euro area. Those loans had three year maturities and a 0.5% interest rate. That given, the new LTROs needed badly in Eurozone should obviously be of longer maturities and of lower interest rates. This move will also facilitate some Eurozone sovereign borrowers to secure more and cheaper loans they desperately need.

In short, the ECB is now almost obliged to print and distribute more money all over Eurozone. All euro area banks along with the southern countries and the SMEs need more and cheaper liquidity. This is not only a prerequisite for growth, but now has become a necessity to avoid more recession.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

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

How to build a more resilient and inclusive global system

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

France is building a village for people with Alzheimer’s

A Sting Exclusive: “Digital iron curtain makes no sense in 5G era”, by China’s Ambassador to EU Mr. Zhang Ming

Reintegrating former rebels into civilian life a ‘serious concern’ in Colombia: UN Mission chief

Deadly Mali attack to be investigated by UN rights experts

Can medical students be prepared for Global Health ethical issues?

“The winner is who can accelerate the transition to a new digital era”. The Sting reports live from EBS 2015: a Digital Europe 4.0

The digital transformation is a skills and education opportunity for all. Companies must use it

Trade: EU-Singapore agreement to enter into force on 21 November 2019

These vending machines are giving out free short stories to London commuters

Turning Europe into a giant wind farm could power the entire world

Transition between education and employment: how the internship culture is threatening the foundations of our education

How women are transforming the Arab world’s start-up scene

Is history a new NATO weapons against Russia?

WHO chief underscores need to address climate change following visit to Bahamas

7 of the world’s 10 most polluted cities are in India

We need to rethink the way we heat ourselves. Here’s why

“Beyond the beach: tackling plastic pollution upstream”, a Sting Exclusive by Erik Solheim, Head of UN Environment

Turkey’s foreign bribery enforcement framework needs to be urgently strengthened and corporate liability legislation reformed

More funding needed to tackle child labour in agriculture says UN, marking World Day

Mass-graves found of at least 535 killed during ‘organized and planned’ inter-communal attacks in western DR Congo

Antitrust: Commission imposes binding obligations on Gazprom to enable free flow of gas at competitive prices in Central and Eastern European gas markets

A Sting Exclusive: EU Commission’s Vice President Šefčovič accentuates the importance of innovation to EU’s Energy Union

Energy Union: EU invests a further €800 million in priority energy infrastructure

Cédric in India

A refugee from Syria cries out: “I’m not just a number!”

Why the financial scandals multiply?

This is what countries are doing to fight plastic waste

Following the World Cup? Then you’re watching high-performing migrants at work

Is your smart home as safe as you think?

Encouraging progress made in 2018, in ‘zero tolerance’ effort to end sexual exploitation and abuse across UN

Human Resources Information Systems Specialist Trainee – 2013

Member states jeopardising the rule of law will risk losing EU funds

Global economy to see ‘steady’ growth of three per cent in 2019 despite risks, says UN

Why India can show us how to achieve growth with purpose

The EU parliamentary elections, explained

rescEU assets mobilised to help Greece fight devastating forest fires

Afghanistan: UN mission condemns deadly attack near Kabul airport

Cyclone Idai: UNICEF warns of ‘race against time’ to protect children, prevent spread of disease in flood-ravaged Mozambique

MEPs back plans to promote water reuse for agricultural irrigation

Opposite cultures: Should it be a problem?

Making technology work for 1.3 billion Indians

The cost of generating renewable energy has fallen – a lot

Palestinian students ‘compelled to drop dreams because of financial cuts’

Governments should renew efforts to reform support to agriculture

Let the Italians have it their way, it may be good for all Eurozone

“Fortress Europe”, “Pegida” and its laughing stocks

Our Digital Future

Bank resolutions set to remain a national affair

Internet milestone reached, as more than 50 per cent go online: UN telecoms agency

Nuclear weapons in Lithuania: defence against Russia or target for terrorists?

Three-quarters of South Sudanese children have known nothing but war, says UNICEF

The EU finally seizes the opportunity to support the sharing economy?

COP21 Breaking News_05 December: UN Secretary-General Announces “Climate Action 2016” Partnership

4 ways sporting events are becoming more sustainable

MEPs spell out priorities for the European Central Bank and on banking union

Scale of displacement across Myanmar ‘very difficult to gauge’, says UN refugee agency

This warehouse is one of the world’s greenest industrial buildings

In the future of work it’s jobs, not people, that will become redundant

UN and civil society team up to make cities more sustainable and inclusive

UN rights chief ‘alarmed’ by upsurge in attacks against civilians in Syria’s Idlib

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