The ECB will do whatever it takes to set the Eurozone economy again in motion

Michel Barnier, Member of the European Commission in charge of Internal Market and Services, Jonathan Faull, Director General of DG "Internal Market and Services" of the EC, and Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB) (from left to right). The occasion was a conference on "Financial Stability and the Single Market – The Keys to Growth in Europe". (EC Audiovisual Services).

Michel Barnier, Member of the European Commission in charge of Internal Market and Services, Jonathan Faull, Director General of DG “Internal Market and Services” of the EC, and Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB) (from left to right). The occasion was a conference on “Financial Stability and the Single Market – The Keys to Growth in Europe”. (EC Audiovisual Services).

Benoît Cœuré, Member of the Executive Board of the ECB, speaking at the high-level conference on “Monetary Policy in the New Normal” organised by the IMF in Washington D.C., on 13 April 2014, described in detail the unconventional monetary policy tools the Eurozone’s central bank is about to use, in order to affect (reduce) interest rates and thus support growth in the real economy. This is what is briefly referred to as the ‘quantitative easing’ monetary policy instrument (in reality printing and distributing money), that the ECB has actually never used as a proper tool, because in the face of it, its mandate forbids the direct financing of real economy agents, through purchases of their debt paper.

It seems that this is about to change now, with the consent of Germany, in view of the imminent danger that the entire euro area may slide into a trap of very low or negative inflation and stagnation or even recession. The rise of the foreign value of the euro leads straight towards this dreadful eventuality. The appreciation of the parity of the euro in relation to the other major currencies of the world is pressing euro area inflation towards the negative area and deprives the real economy from sustainable growth prospects.

Avoiding deflation and stagnation

In view of all that the new unconventional monetary policy instruments (printing money actually) currently under assessment by the ECB will act in both ways. First it will help the SMEs and the households in the crisis hit countries to start borrowing again. Secondly it will arrest the rise of the euro, if not facilitate its return to more acceptable levels around the 120-130 American cents area from the currently 140 highs.

In any case the prime target is to reduce interest rates and facilitate borrowing in certain euro area countries like Italy, Spain, Greece and Portugal and elsewhere, where offers of new bank loans to businesses and households have disappeared for many years now. Actually the overall volume of bank loans to the real economy in those jurisdictions has been constantly shrinking since the outbreak of the 2008-2010 credit crunch.

Yes the ECB will print more money

All those problems and the new monetary instruments to counter them, have been publicly identified and analysed by Mario Draghi the President of the ECB and other members of its Executive Board. Now Cœuré goes a step forward and grossomodo describes the shape and the magnitude of the new extraordinary policy instruments. The extent of the new things to come may be judged by the Cœuré’s quote from Giuseppe Tomasi di Lampedusa. The banker said that “in these unusual times, “everything must change, so that everything stays the same”. It is this that will determine both the appropriateness of using targeted asset purchases in our monetary policy operations, and the design of any such purchases”.

However the central banker analysed the details, while describing those new monetary instruments. When referring to the magnitude and the direction of the new policy tools he stressed, “Overall, the yardstick for the success of any targeted asset purchases would not be the size of our balance sheet, but the observable effect of our operations on term premia across markets and jurisdictions. Or put differently, asset purchases in the euro area would not be about quantity, but about price”. It must be explained here that by the term, ‘term premia’, he means the interest rate time curve and obviously he wants it to move downwards in its entirety. As he puts it, the reduction of interest rates will be the ‘yardstick’ of the success of the new policy.

SMEs and households

There are more messages in the above passage. The central banker said that the target of ECB’s purchases of debt paper will be a reduction of interest rates “across markets and jurisdictions”. In short, the real target is the worst hit by the financial crisis countries, still being tormented by scarce and expensive financing. In reality the real success ‘yardstick’ will be facilitation and the reduction of the interest cost of new bank loans to SMEs and households. The big business can finance themselves directly from the capital markets outside the banking system. This said the whole new extraordinary measures and policies to be undertaken by the ECB have as target to make life easier, for the SMEs and the household, who depend exclusively on bank loans for their financing.

Whatever it takes

Apart from the targets of the new monetary tools Cœuré had another crucial message about the magnitude of the extraordinary measures. He clearly stated that “the yardstick for the success of any targeted asset purchases would not be the size of our balance sheet”. This is a strong but indirect reference to the magnitude of the intervention, letting it to be understood that the only restriction won’t be the size but the success of the operation. In short the ECB will print and distribute as much money as needed to set again in motion the productive machine, in the crisis hit countries.

This sounds like the famous Mario Draghi statement back in September 2012, when he assured the world that “we will do whatever it takes in order to save the euro and believe me it will be enough”. Today the same powerful ‘whatever’, is again used to rescue more than half of Eurozone from deflation and recession.


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