Mario Draghi, President of the European Central Bank, Siim Kallas Vice President of the European Commission (from left to right). Kallas acts as interim Commissioner responsible for Economic Affairs and the euro. (Photographic Library of “The Council of the European Union”, 05/05/2014).
Eurostat, the EU statistical service, announced yesterday its flash estimate for May inflation at 0.5%, down from 0.7% in April, thus raising concerns that Eurozone is irreversibly heading to deflation area and confirms fears that the single money zone is threatened by a too low inflation for a too long period of time. Falling prices are recorded in the largest economy of the euro area, Germany. According to the Federal Statistical Office of the country, in April 2014 the index of producer prices for industrial products fell by 0.9% compared with the corresponding month of 2013.
Coming back to Eurostat, the statistical office of the European Union estimates also that in Eurozone the price index for non-energy industrial goods in May remained unchanged (0% inflation) in comparison with the same variable of May 2013. Non-energy industrial goods constitute the heart sector of the EU economy and price & cost developments there reflect the core prospects of the entire economy. The European Central Bank has set the inflation target at below but close to 2%, a level that doesn’t seem achievable if the current forces continue in their course.
It’s not only inflation that falls
Unfortunately, falling inflation is not the only problem of Eurozone. General economic stagnation and recession has been haunting Europe for many years. More than unfortunate, even lamentable is the fact that the government of the largest economy of Eurozone, Germany, is determined to continue on the same policies which have brought Europe to a standstill.
Berlin, from a very narrow national point of view might be right in following austere policies and rejecting so far the extraordinary monetary measures to ‘artificially’ support growth (by printing new money). The country is deprived from natural energy sources, has limited availability of arable lands and thus has to depend on real, not monetarily supported competitiveness for its exports, needed to pay for imports. But all things have a limit. Following these Teutonic policies, Germany has accumulated almost €1 trillion in reserves at the expenses of its trade partners within and without the Eurozone, and all of them France, Italy and the US included, are now strongly protesting.
Still Berlin doesn’t seem to back off from the austere economic recipe. This said, there is no other true European institution in sight than the ECB, to intervene and correct the economic policy mix currently applied invariably on all Eurozone countries, wealthy and agonizing ones alike. Things have come to such a stalemate that all the southern Eurozone countries including France cannot cope any more with the German inspired austerity.
Again it’s the banks
Nevertheless, Berlin probably would have continued on these policy lines if the German banks could cope with the economic stagnation of Eurozone. The mighty Deutsche Bank, which some months ago had been boasting that it didn’t need additional capital injections, has now come out looking for €8 billion in additional equity. In a stagnant economy though all Eurozone banks will find it too difficult to cover their additional capital needs so as to pass the stress tests of equity adequacy and quality, presently conducted by the ECB.
That’s why the German central bank, the Bundesbank, broke first the German defense line and accepts now the introduction of extraordinary monetary measures to be applied by the ECB, in order to support economic growth. The target is to greatly increase the liquidity of Eurozone’s banking system and at the same time impose penalties for the money parked by banks with the ECB. This last measure will probably be an additional goad on banks to lend out the new liquidity they are going to receive and thus support the business sector and households to increase their activities and their expenditure.
Of course ECB’s abilities are more restricted than the one’s of its American counterpart. The Fed in its quantitative easing (QE) has so far spread around the world anything around $5 trillion during the last few years. ECB’s abilities are more restricted and it is still questionable if there will be today any announcement for QE by the euro area monetary authorities.
ECB’s governors meet today
To be noted, the Governing Council of the ECB is holding today its regular monthly policy fixing meeting and after that, President Mario Draghi will deliver a policy presentation Press conference this afternoon. He is expected to announce a reduction of ECB’s main interest rate now at 0.25% and certainly Draghi will also elaborate on the extraordinary monetary measures to be introduced. The fall of the euro against the dollar over the past few days is an infallible witness of the new measures expected from the ECB.
The new measures will have a twofold target. First to increase the liquidity of the banks, induce them to expand their lending to the real economy and reduce the cost of loans and secondly to arrest, even substantially reverse, the many month-long rally of the euro against the other major currencies of the world.
Hopefully all that will help the Eurozone start growing again, thus support the crisis countries and also help the euro area banks recapitalize themselves, through equity issues in the market.
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