Draghi: printing a full extra trillion non negotiable to help all borrow cheaply

President of the European Central Bank (EBC) Mario Draghi (reading a document) met the European Parliament's economic committee to discuss ECB's perspective on economic and monetary developments. (EP Audiovisual Services, 17/11/2014).

President of the European Central Bank (EBC) Mario Draghi (reading a document) met the European Parliament’s economic committee to discuss ECB’s perspective on economic and monetary developments. (EP Audiovisual Services, 17/11/2014).

European Central Bank President Mario Draghi speaking at the economic and monetary affairs Committee of the European Parliament last Monday, made at least two direct references to additional monetary measures, to confront the anaemic economic conditions in Eurozone, “if warranted to achieve price stability over the medium term”. He referred to this prospect once while delivering his introductory speech at the hearing of the Committee and secondly when addressing a MEPs’ questions. He also clarified that, “we have also tasked relevant ECB staff and Eurosystem committees with the timely preparation of further measures to be implemented, if needed”.

With ECB’s Governing Council having already decided to effectuate acquisitions of asset-backed securities and covered bonds, the next monetary policy step in this quantitative easing line of measures, cannot be anything else other than the outright purchases of corporate and government bonds. Even more revealing was the intervention of Klaas Knot, a member of the ECB’s Governing Council and President of the Dutch central bank, De Nederlandsche Bank. Last Tuesday Knot said that the ECB may well take additional quantitative easing measures, “including purchases of government bonds”.

Printing new money

Of course, all these ECB policy steps end up to printing of new money, which is handed out to lenders. The exercise is realised through central bank purchases (against freshly printed cash) of securitised bank loans or of large parts of the lenders’ stock of corporate and government bonds. This bold policy has been freely applied during the past six years by all the major central banks of the world, and more importantly in the US (Fed), in Britain (Bank of England) and Japan (BOJ). Their target was and of course still is to revive the faltering real economy, in the aftermath of the 2008-2010 financial crisis, by means of printing and freely distributing money.

Unlike what happened in the rest of the developed world, the ECB under the influence of its largest member the German central bank (the Bundesbank), avoided following the same policy lines. As it turned out, the US and Britain, extensively using this policy of quantitative easing during the past years, have actually helped their real economy grow albeit moderately. Most importantly they have managed to progressively reduce unemployment to tolerable single digit levels.

On the contrary, Eurozone still suffers from recession or stagnation, with skyrocketing unemployment. This has brought a number of its member states to their knees, actually testing the limits of their social endurance and unsettling their political life. The appearance of Eurosceptic, extreme and even clownish political parties is the direct outcome of this process.

The danger of deflation

On top of economic stagnation and high unemployment, the next major strain Eurozone currently endures is the falling inflation rate, currently at 0.4%, very close to absolute zero, in contact with the frightful negative part of the chart. This is much lower than ECB’s institutional target of below but close to 2%. According to the same source, inflation in the foreseeable future will remain at considerably lower levels than the institutional target. Obviously this fact obliges the central bank to take action and support inflation to reach the target.

This reality has armed Mario Draghi with a very solid argument against the austerity-loving and monetary-easing-hating Germans. Under the circumstances, Draghi can even contemplate the printing and the distribution of a full additional trillion of euros to be partly used to purchase corporate and government bonds. He almost said this plainly by stating that the Governing Council has mandated the staff of the ECB “with the timely preparation of further measures”. The next step, after the acquisition of ABSs and covered bonds, is the purchases of corporate and government bonds.

Draghi reassured the MEPs

That’s why Draghi, in his regular monetary dialogue with European deputies responsible for economic and monetary affairs, reiterated that the “ECB’s balance sheet could go up to the level of March 2012 if needed”. This is a direct reassurance for the forthcoming printing of an additional trillion euro. When asked whether this was a target or an expectation, he said that “it is an expectation” and added that “if not fulfilled, other measures might be taken”. The next day Knot explained that the purchases of sovereign debt may be included in these “other measures”.

Expectation or target?

The question about ‘target’ or ‘expectation’ was addressed to Draghi by a German MEPs. Here is why. Last week, Jens Weidmann, the Governor of the German central bank, the Bundesbak, termed the policy action (to increase ECB’s balance sheet by one trillion) unanimously endorsed by ECB’s Governing Council (including him), as an ‘expectation’ not a ‘target”. Of course this is always in reference to the one trillion to be printed and distributed to banks. Draghi though paid lip service to what Weidmann had said, because he clarified that “if not fulfilled (the printing of one trillion), other measures might be taken”. Then the trillion is evidently becoming a clear-cut target, not an expectation. Expectations are not targeted with additional measures until being fully achieved, only targets do.

After that, Weidmann must be in a very awkward position. It is understood that even the Berlin government doesn’t any more back his ultra-orthodox beliefs, that the central banks should not support the real economy with monetary easing. Berlin is now obliged to think in more ‘European’ terms, that the Bundesbank still cannot understand.

For similar reasons, Axel A. Weber, Weidmann’s predecessor, had quit and Berlin had accepted his resignation without much grief. However, Weidmann hasn’t followed Weber’s example, despite Draghi having ignored him more than once, and still Berlin didn’t seem to bother. This is rather a sign that Germany slowly changes, accepting that the country has to adapt to the needs of others, grasping that the German way is not the only available path.

Over the next months the situation will be cleared up, when the ECB starts to purchase corporate and government bonds, helping the south of Eurozone to cut down the cost of servicing its debts and find new and cheaper capital resources.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

On Human Rights Day European Youth Forum calls for end to discrimination of young people

This afternoon Britain will be once more isolated from mainland Europe

Eurozone: Disinflation engulfs the industrial goods sector

Vulnerable young people must not be blamed & stigmatised for violent radicalisation

Britain and Germany change attitude towards the European Union

Alice in Colombia

The Parliament defies a politically biased Banking Union

The big challenge of leadership and entrepreneurship in Europe

Eurozone’s north-south growth gap to become structural

On the euro but out of it?

EU sets ambitious targets for the Warsaw climate conference

Intel @ MWC14: Our Love Story with Mobile – Transforming Wireless Networks

Trump asked Merkel to pay NATO arrears and cut down exports ignoring the EU

Everybody against Germany over the expensive euro

Doctors without borders

Arlington, USA: kick-off of the fifth round of the EU-US boxing match

European Confederation of Junior Enterprises hosts in Geneva the Junior Enterprise World Conference

ECB embarks on the risky trip to Eurozone banking universe

Medical students: The need for emigration

While EU Open Days 2013 discuss the 2020 strategy, Microsoft shares a glimpse of EU 2060

The scary EU elections result and the delayed Council’s repentance

China’s stock markets show recovery signs while EU is closely watching in anticipation of the €10bn investment

Germany fears that Americans and Russians want to partition Europe again

Trailing the US-EU economic confrontation

YOUTH RIGHTS AT RISK FROM RISE OF EXTREME-RIGHT AND POPULISTS IN THE EUROPEAN PARLIAMENT

EU to negotiate an FTA with Japan

ECB readies itself for extraordinary monetary measures defying Germany

Zhua Zhou: Choosing The Future

Marco Polo’s Dream

Any doubt?

Happens now in Brussels: Green Week sets the EU and global climate policy agenda

The completion of the European Banking Union attracts billions of new capital for Eurozone banks

Germany to help China in trade disputes with Brussels

Exchanges of medical students and the true understanding of global health issues

Access to health in the developped and developing world

Will the EU ever tackle the migration crisis despite the lack of political will?

GSMA Mobile 360: Connecting Cities, Connecting Lives, Connecting Europe

French elections: by the time the EU economy revives and the migration crisis is solved extremists could take over Europe

The next 48 hours may change the European Union

Nitrate pollution of water sources: new impulses for EU Water Policy?

18th European Forum on Eco-innovation live from Barcelona: What’s next for eco-labelling?

Intel, Almunia and 1 billion euros for unfair potatoes

COP21 Breaking News_03 December: Europe’s children urge leaders to commit to climate action at UN Climate Summit in Paris

No better year for the EU’s weak chain links

Can Kiev make face to mounting economic problems and social unrest?

EU and Amazon cut deal to end antitrust investigation over e-books deals

COP21 Breaking News_03 December: There is a new draft agreement on the negotiating table

Fear casts again a cold, ugly shadow over Europe; Turkey sides with Russia

The European Commission cuts roaming charges. But “it’s not enough”…

A hot autumn after a cool summer for Europe

EU-US to miss 2015 deadline and even lose Germany’s support in TTIP’s darkest week yet

Can the banking union help Eurozone counter its imminent threats?

Should Europe be afraid of the developing world?

Access to ‘affordable’ medicines in India: challenges & solutions

Is Europe misjudging its abilities to endure more austerity and unemployment?

IMF – World Bank meetings: US – Germany clash instituted, anti-globalization prospects visualized

Global Citizen – Volunteer Internships

10 months were not enough for the EU to save the environment but 2 days are

The EU accuses Russia of bullying Ukraine to change sides

More Stings?

Comments

  1. ELLO
    Are you interesting of an urgent loan to pay off your bills, task, financial problem, want to buy a house, start up a business, build a company, any financial need of your choice Mr Godwin Samson Loan Services is here to end up your sorrow and pains quickly get back to us via email:godwinsamsonloanservices324@gmail.com and once we receive your mail, more detailed containing our company loan data will be forward to you regarding your loan transfer. You are very welcome to our lending home any time any day,we await your urgent responds.

    Regards,

    Mr Godwin Samson.
    C.E.O

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 )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s