Predicting two more years of economic stagnation

José Manuel Barroso, President of the European Commission (in the centre), Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro (on the left), and Michel Barnier, Member of the EC in charge of Internal Market and Services, gave a joint press conference on the blueprint for a deep and genuine Economic and Monetary Union (EMU). (EC Audiovisual Services).

José Manuel Barroso, President of the European Commission (in the centre), Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro (on the left), and Michel Barnier, Member of the EC in charge of Internal Market and Services, gave a joint press conference on the blueprint for a deep and genuine Economic and Monetary Union (EMU). (EC Audiovisual Services).

Yesterday, as expected, the European Central Bank kept its basic interest rate unchanged at 0.25%. As usually, the decision was taken in the meeting of the bank’s Governing Council, the first of 2014. At this almost zero interest rate cost commercial banks get ample liquidity from the ECB and then lend this money to the private sector that is households and businesses, charging them with double-digit interest cost. Of course, large companies do not rely on banks for their financing and don’t pay such dear rates for their loans. It’s the consumers and the SMEs that pay the price.

In this respect, the President of ECB Mario Draghi revealed that the commercial banks of Eurozone showed lately “a preference for liquidity although it was below the peak of 8.7% observed in April 2013”. The truth is that Eurozone’s lenders borrowed a lot of cash from the ECB before the end of the year of course paying that near zero interest rate. Mysteriously, this money didn’t surface in the monetary market. Draghi explained that “The annual growth rate of loans to households stood at 0.3% in November, broadly unchanged since the beginning of 2013. The annual rate of change of loans to non-financial corporations was -3.1% in November, following -3.0% in October”. Then it’s a mystery what the major banks did with the money they took for free from the ECB. In short, the banks get the money from the ECB and use it for unknown purposes.

Cheap and abundant money for the banks

However, despite the fact that the banks do not lend the money they get from the ECB to the real economy to help it grow, Draghi confirmed that “the Governing Council strongly emphasises that it will maintain an accommodative stance of monetary policy for as long as necessary”. This means the ECB will keep supplying all and every Eurozone bank with unlimited quantities of liquid money covering fully all the relevant queries. It’s not only that. The ECB also promises to continue offering money to banks at almost zero interest rate. To this effect Draghi said that “Accordingly, we firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time”.

Of course, the central bank is forced to act like this, given the sluggish state of the economy. “As previously stated, this expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics”. It’s a one way road for the ECB to continue pumping cheap money to the economy. The problem is that this can be done only through the banks, but the lenders keep denying offering this extra money to the loan market.

Predicting stagnation

In any case, the central bank will continue to follow the same monetary policy in the foreseeable future. As the President of ECB put it “Looking at 2014 and 2015, output is expected to recover at a slow pace, in particular owing to some improvement in domestic demand supported by the accommodative monetary policy stance”. Understandably, if ECB’s monetary policy stopped been fully accommodative, Eurozone economy would risk an abrupt return to recession. Obviously the ECB is obliged to continue supporting the barely growing or stagnant real economy by replenishing the coffers of the banks with zero cost and ample money supply. Under the present circumstances any other option may be catastrophic. It’s as if the banks hold the real economy as hostage.

The sluggish prospects of the real economy were confirmed yesterday by two announcements. In the first case the Commission revealed that the “Business Climate Indicator remained broadly unchanged in December”. On the second occasion, the Commission said that “the Economic Sentiment Indicator reached in December its long-term average (100.00) for the first time since July 2011”. In both cases the conclusion is that the Eurozone economy is rather stagnant. Unfortunately there is no indication that things will change during the next two years. Draghi accepted that, “in 2014 and 2015 the economy will recover at a low pace”. Mind you he didn’t say ‘will progress’ but rather choose the term ‘recover’. In short, a slow pace recovery is the best the Europeans can expect for the next years. Only the politicians talk about growth, but who believes them…

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

Is academia losing its chance to capitalize on technology?

Close to 7,000 evacuated from Syrian towns after enduring nearly 3-year siege

The United Nations, 75 years young: Engaging youth social entrepreneurs to accelerate the SDGs

Consumer protection: Commission welcomes political agreement by Council on the Representative Actions Directive

‘Many challenges to overcome’ at UN, in fight against abuse: victims’ advocate

Impressive African health gains at risk from changing trends: WHO report

The European Sting @ Mobile World Congress 2014, Creating What’s Next for the World. Can EU Policy follow?

Silicon Valley can do more to achieve the #GlobalGoals

Is it too soon to hope for a tobacco free Romania?

UN rights chief ‘strongly condemns’ attack on Indian security forces in Kashmir

Nearly two-thirds of children lack access to welfare safety net, risking ‘vicious cycle of poverty’

Commission proposes a governance framework for the Budgetary Instrument for Convergence and Competitiveness

UN News Daily #UNGA Guide: Mandela Peace Summit, Global Goals, Youth and Yemen

Scores of Rohingya refugee shelters in Bangladesh destroyed by flooding

UN Human Rights chief urges Venezuela to halt grave rights violations

An expert in the South China Sea issue on an exclusive interview at the European Sting

InvestEU Fund: boost for sustainable, innovative and social investment

Teachers launch a free ebook to help children cope with the pandemic

Immigration crisis at its very worst: EU to outsource rescue business to North Africa?

UN chief condemns terror attack in Kismayo, Somalia

When did globalization begin? The answer might surprise you

A reflection of health inequity in recent epidemics

Here’s how India can soar in the Fourth Industrial Revolution

It’s just electronic cigarette, don’t worry?

Technology is delivering better access to financial services. Here’s how

Increasingly under attack, women human rights defenders need better back up

Hundreds of wounded Gaza protesters risk limb amputation without immediate help, warns top UN official

Half of all mental illness begins by the age of 14

iSting: a reader’s thoughts on the UN Environment Assembly 2017

The psychology of pandemics

Stronger partnerships with post-conflict countries needed to ensure ‘path towards durable peace’: UN chief

Millennials aren’t voting – but these young leaders have a plan to change that

GSMA Mobile 360 Series – Latin America, in association with The European Sting

We can meet the SDGs using the wisdom of crowds. Here’s how

First 17 “European Universities” selected: a major step towards building a European Education Area

‘We can’t stop COVID-19 without protecting health workers’: WHO chief

Environmental labelling, information and management schemes are central to the circular economy

Deutsche Bank again in the middle of the US-EU economic skirmishes

Lebanon: UN rights office calls for de-escalation of protest violence

8th Euronest Assembly: the future of relations with Eastern partners

Traditional finance is failing millennials. Here’s how investing needs to change

Medschool 4.0: how to succeed in the smart revolution of healthcare

‘Comprehensively include migrants’ or sustainable development won’t happen, warns General Assembly President

This is what chief economists think about the global economy right now

The European Parliament wants to stay in one place

UN political chief calls for dialogue to ease tensions in Venezuela; Security Council divided over path to end crisis

Green Deal: How MEPs wish to channel EU investment to sustainable activities

Open, inclusive and diverse cities are better for business and economic growth

TTIP’s 11th round starts in Miami but EU-US businesses see no sunny side

WEF Davos 2016 LIVE: “If we do not do properly the Paris agreement, then all 16 remaining goals will be undermined”, UN Secretary General Ban Ki-moon cautions from Davos

We must learn and change after Haiti sexual abuse scandal -Oxfam chief

COVID-19: EU working on all fronts, €232 million for global efforts to tackle outbreak

Conflicting statistics and bad banks haunt the Eurozone

International Literacy Day: What you need to know about youth literacy

How each country’s share of global CO2 emissions changes over time

France and Germany can’t reach consensus regarding EU’s top jobs

How to tap the talents of refugees – one student at a time

The scary EU elections result and the delayed Council’s repentance

OECD tells Eurozone to prepare its banks for a tsunami coming from developing countries

More Stings?

Advertising

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