Five-year low inflation for Eurozone and now Mario has to finally wake up the Germans

Mario Draghi, President of ECB, at the press conference of G20 in February 2012. Seems he could not imagine that 2 years later the Eurozone inflation will note a five-year low. (EC Audiovisual Services, 25/02/2012)

The European Central Bank’s (ECB) governing council is gathering today in Naples to discuss the monetary policy just two days after the publication of the flash estimate of the annual inflation of the Euro area by Eurostat, the statistical office of the European Union. The inflation is expected to be 0.3% in September, a 0.1% drop compared to August’s estimates. This disappointing news and the weakening of the euro against the U.S. dollar will affect the agenda of the meeting by forcing the ECB’s officials to think about implementing a more radical policy. What will make inflation rise again? The annual inflation of the Eurozone continues the downfall which makes everybody nervous and increases the fears of an imminent deflation. The fact that in September it reached a five-year low means that we find ourselves in a position even worse than the one at the beginning of the global financial crisis, in terms of annual inflation at least. ECB’s inflation target, which is below but close to 2%, seems very far away from the current situation. Mario Draghi, the president of the ECB, is more than determined to use every weapon in his arsenal in order to achieve this goal. The use of the monetary easing is put into action in order to increase inflation; however it is too early to say if it is going to work or not. One thing is for sure; this is a long-term measure and we should provide the required time to see its effects on the economy. This is one of the measures that will help inflation rise again but according to Mario Draghi national governments have to add to this by making further reforms and not let the ECB alone in this battle against inflation and economic growth. Euro is losing ground against the U.S. dollar The euro/U.S. dollar currency exchange rate is showing signs of falling to crisis-levels.  This is caused by the low inflation and the monetary policy that the ECB is and will keep on following. More specifically, the euro dropped on Tuesday to its lowest figure since September 2012 at $1.2571, to recover back to $1.2630 at the end of the day. This drop though will be very helpful for the ECB’s goals to raise the inflation rates back to normal levels (close to but below 2%). What is more, the disappointing PMI manufacturing data released from the research group Markit yesterday, a day after the publication of the annual inflation report, will surely keep the euro down against the U.S. dollar. In particular, Germany’s manufacturing data dropped to 49.9 from 50.3. This fall means that Germany reached contraction levels, something that hasn’t happened to the strongest European economy the past 15 months. ECB tries but Germany is against ECB is doing its best to increase the inflation rate and provide liquidity to the market by providing interest-free loans to the banks in order to start lending. Also, another tool of the quantitative easing programme is the purchase of government bonds. However, Germany opposes to this because of the fear that this measure will have catastrophic consequences to the richest countries which will have to transfer their money to the poorest ones. Germany basically is afraid that the wealthiest economies will have to absorb the losses in case any of these countries default on their debts. On the other hand, though, the austerity model that Germany supports has proven incapable of producing growth to the EU. Thus, Germany must revise its views and give a chance to ECB’s monetary policy.