ECB bets billions on Eurozone’s economic recovery

Mario Draghi, President of the European Central Bank, Michael Noonan, Minister for Finance of Ireland, Pierre Moscovici, Minister of Economy, Finance and Foreign Trade of France, Olli Rehn, European Commissioner in charge of Economic and Monetary Affairs (European Council – Council of the European Union, TV-Newsroom).

Mario Draghi, President of the European Central Bank, Michael Noonan, Minister for Finance of Ireland, Pierre Moscovici, Minister of Economy, Finance and Foreign Trade of France, Olli Rehn, European Commissioner in charge of Economic and Monetary Affairs (European Council – Council of the European Union, TV-Newsroom).

Last Wednesday, one day ahead of the regular monthly meeting of European Central Bank’s Governing Council, Eurostat, the EU statistical service, published a Press release on Eurozone’s near zero economic growth. The relevant passage of that text went like this, “Seasonally adjusted GDP rose by 0.2% in the euro area (EA18) and by 0.3% in the EU28 during the first quarter of 2014, compared with the previous quarter, according to second estimates published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2013, GDP grew by 0.3% in the euro area and by 0.4% in the EU28 “.

It was pretty clear that growth in the euro area economy remained not only quite anemic but it was steadily heading towards the negative part of the graph. Understandably, all the members of ECB’s Governing Council had access to this information before converging to Frankfurt to participate in last Thursday’s gathering. They also knew that “In April 2014, compared with March 2014, industrial producer prices fell by 0.1% in both the euro area and the EU28, according to estimates from Eurostat “. Last Tuesday, this most reliable statistical authority had also produced a Press release announcing a new fall of the overall inflation rate in May to 0.5% according to the standard flash estimate procedure.

Extraordinary measures for growth

In conclusion, it was completely evident then that Eurozone was heading, if not towards a deflation and recession dual precipice, to at least a very lengthy stagnation trap. In reality, this dreadful prospect must have been apparent to the members of the ECB’s Governing Council, even from their May meeting at the beginning of the previous month. On that occasion, the European Sting observed (on 12 May) that “Draghi, the ECB’s President said the ECB governors will unanimously agree in June, in taking extraordinary monetary 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 also 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”.

As a matter of fact, last week, on Thursday 5 June, the Governors of euro area’s central bank unanimously decided to reduce the basic interest rate of the bank to 0.15% from 0.25%, and introduce for the first time a penalty of -0.1% on idle money deposits parked by commercial banks with the ECB. Draghi also announced extraordinary monetary measures in order to support the liquidity of the financial system and thus help the granting of bank loans to the real economy. He stopped short only from announcing quantitative easing, that is straightforward new money printing.

No quantitative easing

The extraordinary measures include a series of targeted longer-term refinancing operations (TLTROs) aimed at improving bank lending to the euro area private sector. Banks will be refinanced on their loan balances, excluding loans to households for house purchase. The ECB will also “intensify preparatory work related to outright purchases of asset-backed securities (ABS)”. Those two instruments (TLTROs and purchase of ABSs) are obviously targeted to refinance the commercial banks by replenishing their liquidity, so as they can start a new cycle of lending to the real sector.

In detail, under the TLTROs commercial banks will be entitled to a borrowing allowance from the ECB equal to 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. All TLTROs will mature in September 2018. The other line of commercial bank refinancing will be through ECB purchases of securitized high quality loans accorded to real economy agents, aimed also at facilitating new credit flows to the economy.

Betting on growth

Those extraordinary monetary measures are meant to support growth. The problem is however, if they will prove enough to drag the Eurozone out of stagnation. For one thing, the reduction of ECB’s basic interest rate from 0.25% to 0.15% may look unimportant, but it is introduced in a world financial environment of upwards bound interest rates in all the other major currencies. The recent fall of the euro/dollar parity is an indication of the repercussions of this step. The other monetary measures taken last week by the ECB are thought to work towards the same direction, yet their full effect will be seen over the next months, probably well into 2015.

The European Sting has anticipated those extraordinary measures early in the morning of Thursday 5 June, in an article entitled “Falling inflation urges ECB to introduce growth measures today”. The urgent character and the pressing need for those measures were evident many months now. Nonetheless, the German government expressed doubts despite the fact that the country’s central bank, the prestigious Bundesbank, agreed. The German Federal Minister for Finance Wolfgang Schauble said that interest rates must increase in the medium term.

Given its institutional constrains the ECB did what it could, to help Eurozone grow again. It can do more if needed. Quantitative easing remains stored in its arsenal. If the impact of the reduction of the interest rate will prove weak to revive Europe’s economy then the TLTROs and the purchase of ABS could take the lead by acquiring important dimensions. If that also proves insufficient to restore growth and arrest the rally of the euro, quantitative easing will be decided for sure.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

CDNIFY @ TheNextWeb 2014

EU Council approves visa-free travel for Ukraine and cement ties with Kiev

Refugee crisis update: Commission is struggling alone with little help from EU or G7 leaders

This is how people in Europe are helping lead the energy charge

Quality Internships: Towards a Toolkit for Employers

Malta and Slovakia: serious shortcomings in the rule of law

This robot has soft hands. It could be the future of sustainable production

Love unlimited

Banking package: Parliament and Council reach an agreement

Defence: European Commission paves the way for first joint industrial projects under EU budget

The anti-vaccine movement shows the peril of a post-truth world

Everything you need to know about water

Reform of road use charges to spur cleaner transport and ensure fairness

Protests, violence in Haiti prompts international call for ‘realistic and lasting solutions’ to crisis

It’s time to fulfil the promises made to women 25 years ago

JADE Spring Meeting 2016 highlights

The JADE Spring Meeting is about to begin

European Youth Event 2016 – bridge between youth and policy makers

Contact the Sting

China in My Suburbs

World Population Day: ‘A matter of human rights’ says UN

Cybersecurity needs a holistic approach. Here are three ways to build protection

A Sting Exclusive: “Junior Enterprises themselves carry out projects focusing on the environment”, JADE President Daniela Runchi highlights from Brussels

European Commission reacts to the US restrictions on steel and aluminium affecting the EU

Turkey presents a new strategy for EU accession but foreign policy could be the lucky card

Why carbon capture could be the game-changer the world needs

How telehealth can get healthcare to more people

Two days left until General Data Protection Regulation (GDPR), lots of newsletter opt-outs but does the EU citizen really know?

Can the world take the risk of a new financial armageddon so that IMF doesn’t lose face towards Tsipras?

From glass ceiling to glass cliff: women are not a leadership quick-fix

MEPs vote to limit negative impact of no-deal Brexit on citizens

How tomorrow’s buildings will make you – and the planet – healthier

Mainland Europe adopts Germanic cartel business patterns

UN nuclear watchdog will help verify DPRK nuclear programme, if agreement forthcoming

FROM THE FIELD: How the smell of fresh bread transformed one refugee life

Economic sentiment and business climate stagnate in miserable euro area

The EU Commission lets money market funds continue the unholy game of banks

The power of digital tools to transform mental healthcare

“The Belt and Road Initiative should be mutually beneficial for EU and China and every participating country”, Vice-President Papadimoulis of the European Parliament underscores from European Business Summit 2018

EU unveils plan to accelerate Capital Markets Union ahead of London’s departure from the bloc

Drugs cost too much. There is a better way to fund medical innovation

Make progress or risk redundancy, UN chief warns world disarmament body

Is there a way out of the next financial crisis? Can more printed money or austerity save us all?

Here’s what a Korean boy band can teach us about globalization 4.0

Blockchain can change the face of renewable energy in Africa. Here’s how

From inconvenience to opportunity: the importance of international medical exchanges

Promoting rule of law and fundamental rights in the EU

How can we regulate disruptive technologies?

Parliament backs a modernised EU electoral law

Supercomputing could solve the world’s problems, and create many more

Globally, youth are the largest poverty-stricken group, says new UN report

Risks rising in corporate debt market

Amazon indigenous groups want to create a nature sanctuary the size of Mexico

Unlock the value proposition for Connected Insurance

Managing and resolving conflicts in a politically inclined group of team members

EU budget: Stepping up the EU’s role as a security and defence provider

Mali: UN chief calls for calm as clashes leave over 20 dead in Mopti

Is Erdogan losing game and match within and without Turkey?

The Council unblocks all EU budgets

Italy’s revised budget remains roughly unchanged waiting for Europe’s fury

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