ECB’s unconventional monetary measures give first tangible results

José Manuel Barroso, President of the European Commission, went to Sintra, in the Grande Lisboa subregion (Lisbon Region) of Portugal, where he participated in the European Central Bank (ECB) Forum on Central Banking (in the foreground, from left to right). (EC Audiovisual Services).

A strong statement was delivered last week by Mario Draghi, President of the European Central Bank. He ascertained that the monetary measures already taken unanimously by the central bank’s Governing Council, “will enhance our accommodative monetary policy stance”. Those measures have led to an easing of the euro/dollar parity favouring a cheaper single money, a development expected to help Eurozone to start growing again. An additional indication that something might change soon in the moderately and unevenly recovering euro area economy comes from the volume of retail sales which grew by 2.4% in June, compared with the same month of 2013. Let’s take one thing at a time.

At the beginning of last June one euro was valued at 1.375 dollars. On Thursday 5 June the Governing Council of the European Central Bank came out unanimously “in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation”. After that, on Monday 11 August the euro/dollar parity eased to 1.34. Understandably, ECB’s decision to relax its strict monetary policies and flood Eurozone, and why not the world, with hundreds of billions of newly printed euro, had a first early effect on the single European money which started losing some of its super strength.

A cheaper euro

It was high time the euro became a bit cheaper and thus started supporting the competitiveness of the European products in world markets. Nevertheless this is not enough to overturn the stagnation of Eurozone economy. The Italian Prime Minister Matteo Renzi says that his country needs a lot more to be done by the ECB and the EU Commission to help Eurozone become competitive again.

It goes without saying that, by asking for more measures to enhance competitiveness, he doesn’t mean wage cost cuts or more fiscal austerity. The south of Europe had enough of that for four years now. Undoubtedly, Renzi means more relaxed monetary and fiscal policies. The French government has repeatedly stressed that the euro is too expensive and has to become cheaper in order to help Eurozone start growing again and create the millions of much-needed jobs.

No more Teutonic austerity

The other option, namely a continuation of the Teutonic rigorousness on both fiscal and monetary fronts, would lead many Eurozone countries, especially in the south, to uncharted waters. The political and social structures there are already overstretched and more fiscal and monetary austerity can bring about right or left diversions from pluralistic democracy. Of course the German political and economic establishment can’t understand such ‘theories’, because this country functions traditionally at the right limits of democratic pluralism. The two major parties, jointly or separately, have been ruling the place non-stop since WWII.

Coming back to today’s reality, the two German members of ECB’s Governing Council, by voting for the introduction of non- conventional monetary measures, didn’t diverge from their anti-relaxing ideology for the sake of Italy or France or Greece. It’s the health of the German banks that troubles them. The mighty Deutsche Bank with the feet of clay, the other undercapitalized lenders of this country and the regional gyro-banks are loaded with non-performing loans and risky placements. They badly need piles of zero cost money injections from the ECB. That’s why Berlin agreed to the introduction of extraordinary monetary measures by the ECB.

Zero cost money for banks

Last week Mario Draghi went into details about the new low-cost money for Eurozone banks. Understandably, most of that new liquidity will be absorbed by the giant German and French money thirsty giants. Draghi explained “Indeed, the TLTRO (Targeted Long Term Refinancing Operations) will enhance our monetary policy stance in a sense because they implement a significant expansion in credit…We do expect a sizeable take-up. During the last press conference I think I mentioned an upper ceiling (one trillion). Now, market estimates and indications by individual banks would seem to say that, overall – so not only in the first two tranches, but also in the periodic operations – a take-up between €450 billion and €850bn should materialise. On the other hand, it’s quite understandable because these are funds that are at pretty long-term maturity with very, very attractive financial conditions”.

In short, Eurozone bankers are again about to get what they wanted, that is more subsidies in the form of free of charge liquidity. Draghi says that the ECB will make sure that “these TLTROs are funding, they are to be used to lend to the real economy, to the non-financial companies, and especially to the SMEs”. Unfortunately, Draghi knows better that any of us, that it is almost impossible for the monetary authorities to make sure that all this new free liquidity will be used by the banks to support the real economy and the SMEs. Most of it will be used for risky placements in every possible and impossible derivative and credit default instrument markets, from Turkish government bonds to rice and wheat futures. If the bets come out all right the bankers will pocket the hefty profits, if not they will come for more.

Unfortunately, as things stand now, the ECB doesn’t have other options in order to support the real economy, than by flooding the Eurozone banking sector with free of charge money. The fall of the external value of the euro is a first positive corollary of this policy. Possibly some more loans will also be accorded to real economy businesses. All that may revive the retail sales internally and help the exports of goods and services. The increase of the volume of retail trade by 2.4% last June (in comparison with the same month of 2013), may be the first sign of a new, tangible, sustainable and job generating growth trail in the dehydrated landscape of the real economy. Developments over the coming months will attest if this is going to be the case.