Draghi’s ‘quasi’ announcement of a new era of more and cheaper money

Mario Draghi, ECB President speaking at the European Parliament. (EP Audiovisual Services).

Mario Draghi, ECB President speaking at the European Parliament. (EP Audiovisual Services).

Mario Draghi, the ECB President, was more than explicit last week, that the European Central Bank will live up to its duty and do in June whatever it takes to help the Eurozone economy grow again and push inflation a bit upwards, back in line with the institutional target, which is below but close to 2%. If the ECB fails again in the next sitting of its Governing Council, on the first Thursday of June, to take the promised extraordinary measures to support growth, then Eurozone will be a rather difficult place to live and do business in it. Deflation (negative inflation) and recession will be the name of the game in mainland Europe. And all that in a world, where the other developed countries from the US to Japan and from England to Australia, all take monetary measures (by printing more money) to support their real economy grow, while the euro area remains to this day a place where an austere ideology prevails over realities.

To avoid the dreadful present reality from been prolonged and to overcome the last ditches of resistance within the Governing Council against the use of monetary measures for growth, Mario Draghi was adamant last Thursday. He said the ECB governors will unanimously agree in June, in taking extraordinary measures aimed at bringing inflation back in line with the target, set at ‘below but close to 2%’. By applying extraordinary monetary measures the ECB will try to arrest the rise of the euro vis-à-vis the other major currencies, thus helping exports and hindering the rise of imports, in order to support growth. By the same token the ECB will also try to revive the life lines of bank credit to the SMEs in the south of Eurozone.

A dreadful present

If the present situation is prolonged, the SMEs in Italy, Spain, Greece and elsewhere in Eurozone are bound for extinction. They are being deprived of adequate and low-cost bank loans, because the lenders are unable to accord new credits and are actually reducing their overall balance of loans. According to Draghi, “The annual rate of change of loans to Eurozone’s non-financial corporations (adjusted for loan sales and securitisation) was ‑3.1% in March, unchanged from February”. Of course this is a reference to an aggregate assessment of bank loan flows for the entire Eurozone. The same survey detects that the situation is much worse in the crisis hit countries, with the negative developments there indicating a gradual suffocation of an increasing number of business entities, which depend on the banks for their financial needs. No doubt that in this respect the worst hit firms are the SMEs.

In short, the currently applied ECB’s monetary policy for cheap money doesn’t come through for a large part of Eurozone. Not to forget that ECB’s main interest rate is currently 0.25%, but the south of Eurozone is paying unbelievably higher rates than the north, for the same credit risks. In short, ECB’S cheap money policy is rather restricted in the core countries and doesn’t come through on a large part of the Eurozone map. This said, the ECB doesn’t honor its duties vis-à-vis many Eurozone countries and caters only in name for the entire euro area. Actually, many countries are currently deprived of the services of a central bank.

The ECB to change all that

Now let’s find out why Draghi was so certain that the ECB will change all that in June. Last Thursday he said, “The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation”. In this quote, there are two conditions for the taking of unconventional measures. A “too prolonged period” of “low inflation”.

Undoubtedly a 0.5% to 0.7% is a low inflation measurement. Eurostat found that April inflation was 07% after a 0.5% in March. Is this an increase which can solidly indicate a rising inflation tendency? Draghi decisively says, no. He stated that “According to Eurostat’s flash estimate, euro area annual HICP inflation was 0.7% in April 2014, up from 0.5% in March. As expected, given the timing of Easter, the increase was mainly due to a rise in services prices”. Of course, he has more information about inflation prospects than us all, and clearly, what he says here is that, inflation could probably return to 0.5% after Easter or stay at 0.7%.

But for how long the rate of change of the Harmonised Index of Consumer Prices (HICP) will remain at ‘too low’ levels’? Draghi also answered this question as follows, “On the basis of current information, annual HICP inflation is expected to remain around present low levels over the coming months, before only gradually increasing during 2015 to reach levels closer to 2% towards the end of 2016”. Is this a ‘too prolonged period’ of low inflation? If a thirty month period is not ‘too long period’, then words have lost their meaning, because Draghi plainly says here, that inflation will reach its institutionally accepted levels of ‘below but close to 2%’ at the end of 2016!

Then he gave a clear indication about when ECB’s Governing Council will ‘unanimously agree’ to taking extraordinary measures. To this effect he said, “New macroeconomic projections by Eurosystem staff will become available in early June. Medium to long-term inflation expectations remain firmly anchored in line with price stability”. The next sitting of the Governing Council is set for Thursday 5 June and, by then, the new projections of the Eurosystem staff will be available, at least for the governors of ECB.

More and cheaper money

Add all that and the equation gives a result that the extraordinary monetary measures are presumably expected for 5 June. Understandably, the euro/dollar parity will adapt by then to the new situation. As for the kind of extraordinary measures, they cannot be restricted to a mere zeroing of the main ECB interest rate, presently at 0.25%. A quarter of a unit reduction of ECB’s main interest rate means almost nothing to nobody. The measures will probably contain a negative interest rate on the money ‘parked’ by the lenders at the ECB, presently a 0%. There is an even smaller chance for ECB circulating some newly printed money, through purchases in the secondary market of debt paper, private or sovereign.

All in all, there is no doubt that Draghi is authentically expressing the complex and often contradicting interests of ECB’s Governing Council members. However, in this case, he reassured the world that there is unanimity. This is the first time that an ECB President comes so close to announcing such a whole sale intervention in Eurozone’s economy, which will be introduced after a few weeks. Hail the ‘forward guidance’!

 

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

Vaccine against Ebola: Commission grants first-ever market authorisation

The global economy is woefully unprepared for biological threats. This is what we need to do

Sea urchins are overwhelming parts of the ocean. Could turning them into sushi be the solution?

UNICEF chief hopes 2020 will be ‘a year of peace’ for Syria’s children

Remembering Kofi Annan

Parliament elects the von der Leyen Commission

To entrepreneurship and beyond!

Global Citizen – Volunteer Internships

Where America’s refugees came from in 2018

For how long will terror and economic stagnation be clouding the European skies?

The ethical dilemmas of medicine

5G will drive Industry 4.0 in the Middle East and Africa

‘The time for action is now’ senior UN peacekeeping official says, urging support for regional force combating Sahel terrorism

In Sweden you can roam anywhere you like, without the landowner’s permission

Education and Training: where do we stand in 2014?

Can the EU really make Google and Facebook pay publishers and media?

These countries spend the most on education

These are the world’s most future-proof cities

Here are five tips to make your message clear in a crowded world

5G: How a ‘legion of robots’ could help save the rhino

We have the tools to beat climate change. Now we need to legislate

Deliver ‘significant results now’, UN General Assembly President tells COP25 climate conference

How technology can help India breathe more easily

This man ran across the USA to raise awareness of plastic pollution

UNESCO experts ready to assist reconstruction of iconic Notre Dame, following devastating blaze

G20 LIVE: G20 Leaders’ Communiqué Antalya Summit, 15-16 November 2015

Digital IDs and the Digital Economy: the (still) missing link?

The ITU Telecom World on 14-17 November in Bangkok, Thailand

The vehicles of our future

China has announced ambitious plans to cut single-use plastic

What we need is more (and better) multilateralism, not less

How young entrepreneurs should be supported: what assistance should governments provide?

UN lauds special chemistry of the periodic table, kicking off 150th anniversary celebrations

UN chief pays tribute to the courage of DR Congo citizens, and the sacrifice of blue helmets

Why Sweden’s cashless society is no longer a utopia

More than one million sexually transmitted infections occur every day: WHO

ISIL’s ‘legacy of terror’ in Iraq: UN verifies over 200 mass graves

Yanukovych attempts a violent and deadly cleansing of Kiev’s center

UN calls for shipping ‘propulsion revolution’ to avoid ‘environmental disaster’

Digital Single Market: New EU rules for online subscription services

Climate change is a disruptor. Here’s how to harness it for innovation

IFMSA and IPSF on the Health of Migrants and Refugees

Youth Forum calls on Parliament to ease entry into Europe for young people

Address by the President Antonio Tajani at the funeral of Nicole Fontaine

International World Summit Award calls for outstanding digital applications with impact on society from 178 UN member states

How blockchain can manage the future electricity grid

How 5G can connect the affordable homes of the future

The Next Web 2014, the biggest European conference on Internet so far and the Absence of Brussels from Amsterdam

Last-chance Commission: Why Juncker promised investments of €300 billion?

The power of digital tools to transform mental healthcare

MWC 2016 LIVE: Getty chief says one in four new images from phones

Italy’s M.Renzi and Germany’s S. Gabriel veto austerity, ask EU leaders to endorse growth measures

Ebola: EU announces new funds to strengthen preparedness in Burundi

Mental health and suicide: from the 19th century to present

Countries must up their game to reduce low birth weights, warns UN-backed report

South Sudan: ‘Horrific acts’ by government may constitute ‘war crimes’ says UN, demanding justice

Most leaders are missing this crucial character trait

One-third of Afghans need urgent humanitarian aid, millions suffer ‘acute food insecurity’

Ecofin: ‘The Friday battle’ for the banking union

Mergers: Commission opens in-depth investigation into proposed acquisition of DSME by HHIH

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