ECB tied in the anti-monetary German ideology

European Parliament. Committee on Economic and Monetary Affairs (ECON) Meeting: Hearing of Mario Draghi as European Central Bank President. Sharon Bowles (ALDE, UK), ECON Committee Chair (on the left), Mario Draghi and Zalba Bidegain (EPP, ES) (on the right), walking to the meeting room. (EP Audiovisual Services, 16/12/2013).

The European Central Bank President Mario Draghi had a very difficult job yesterday in bridging the Germanic insistence for monetary austerity with the need of supportive measures for the Eurozone real economy to grow. After yesterday’s meeting, the Governing Council of the central bank left the basic interest rate unchanged at 0.25% but it was more important to observe that it didn’t give any hint for the possibility of extraordinary monetary measures to help Eurozone stagnating economy start growing again. The Berlin government and the German central bank, the Bundesbank, do not believe in monetary supportive measures for growth. Hard Teutonic labour is enough they think. But this doesn’t fit all Europeans..

Yet, Draghi didn’t follow all the way the Germanic recipe. He left a back door open for a policy change next month. He said “Regarding the medium-term outlook for prices and growth, further information and analysis will become available in early March”. He felt obliged though, to justify the lack of extraordinary monetary measures by saying “Recent evidence fully confirms our decision to maintain an accommodative stance of monetary policy for as long as necessary, which will assist the gradual economic recovery in the euro area”.

Interest rates not a problem
However, the Eurozone problem isn’t related to ECB’s basic interest rate remaining at 0.25%. A zeroing of it wouldn’t mean much to the stagnating or even receding economies of the south. The Italian and Greek SMEs’ inability to find bank credit wouldn’t be cured if the ECB zeros its rate. It takes much more that to help all the 18 Eurozone countries to grow again. Germany’s moneybags always want higher interest rates and if this is impossible as it is presently, they push for a miser monetary policy, hoping that in the money market they will be able to extort some more interest. South Eurozone countries’ needs are completely different though and the ECB does very little for them, being stuck in Frankfurt‘s Teutonic environment.

Draghi had one word or two for the south, but nothing concrete. He confirmed ECB’s decision to keep interest rates at the present or lower levels and clarified “Recent evidence fully confirms our decision to maintain an accommodative stance of monetary policy for as long as necessary, which will assist the gradual economic recovery in the euro area. We firmly reiterate our forward guidance. We continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time”. Of course many people in Germany would have preferred the ECB to increase its basic interest rates but they don’t dare to say it loudly.

What about the SMEs in the south

In any case, the very low-interest rates don’t seem to help the Italian, Spanish and Greek SMEs to find cheap and adequate bank credit, for similar business risks as their counterparts in the north. To cure this problem the ECB could have tried to use some extraordinary monetary tools. In this respect there is a proposal for new monetary policy aimed at facilitating the loans to the real economy in countries where credit is badly needed. This would entail directed action aimed at the south of Eurozone banks. In this respect, the ECB through the national central banks, could intervene with special credit lines aimed at particular banking sectors in the crisis hit regions. In this way it can support the accordance of loans to the real economy.

The European Investment Bank is doing this but its means are way below the needs of the market. Of course such action would be interpreted by Germany as growth policies, theoretically outside ECB’s mandate. However, all the major central banks of the world, the American Fed and the Bank of Japan among them, are doing whatever it takes to support growth in their economies. They use extraordinary monetary measures flooding their countries with money, in order to help the economy recover and grow.

Extraordinary measures needed

Unfortunately, ECB is bound with the Germanic ideology that forbids the use of monetary means to support growth in the real economy. The closest reference that Draghi made to ECB’s use of extraordinary measures was the one the follows; he said, “it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed”. Understandably, he means that the ECB could, under conditions, follow a special policy line directed to where it is needed most.

New risks from abroad

On the international level, Draghi yesterday sounded the alarm over the new risks already present in the developing world. He stressed that “Developments in global money and financial market conditions and related uncertainties, notably in emerging market economies, may have the potential to negatively affect economic conditions. Other downside risks include weaker than expected domestic demand and export growth”. In this way he wanted to draw the attention of ECB’s Governing Council to a possible financial tsunami threatening developing countries like Turkey, South Africa, India and Brazil. Obviously, this could tame European exports.

The European Sting writer Elias Lacon wrote on 31 January, “As in the case of Greece, the major international lenders flood a market with other people’s money and when they have gained enough for their own coffers, they massively abandon it, without the slightest remorse, of what will happen there afterwards”. This is what is now happening in the developing world, with the American banks retreating their trillions from there. Logically enough, Draghi tells his peers in the Governing Council that this development would affect negatively the Eurozone, making even more necessary the extraordinary action by the ECB. But it seems that Germany blocks this policy line.

In any case, Draghi tries to do the most to support the real economy grow, despite the omnipresent German rein.