ECB’s trillion has to be printed and distributed fast before Armageddon comes

European Union’s "Growth and jobs strategy 2014", proved a total failure. The people responsible for that are here in session. Wolfgang Schäuble, German Federal Minister for Finance, José Manuel Barroso, ex-President of the European Commission, Manfred Weber, Member of the European Parliament and Vice-Chairman of the EPP Group and Martin Kamp, Secretary-General of the EPP Group (from left to right).

European Union’s “Growth and jobs strategy 2014”, proved a total failure. The people responsible for that are here in session. Wolfgang Schäuble, German Federal Minister for Finance, José Manuel Barroso, ex-President of the European Commission, Manfred Weber, Member of the European Parliament and Vice-Chairman of the EPP Group and Martin Kamp, Secretary-General of the EPP Group (from left to right).

The latest Eurostat data on employment and industrial production for the Eurozone economy point invariably to stagnation, if not recession, while the long-term tendency of household consumption, as a percentage of GDP, appears falling. In short all the key growth indicators of the economy are quite disappointing, to say the least. The economic problems of Europe are also aggravated, by the growing over-indebtedness of a large number of euro area governments.

Add to all that the malignant swelling of the exposure of major European banks to risky placements, together with their menacing undercapitalisation and the single euro area prospects appear depressing. During the last weeks however a new negative element appeared; the fast falling prices of crude oil and energy. Under different circumstances this latest development would have been a blessing, but the way it happens now can have negative effects. Let’s start the story from the beginning.

The miserable conjuncture

This gloomy scenery has led the European Central Bank to seriously contemplate the application of a much more comprehensive quantitative easing policy, aimed at flooding the financial markets with more freshly printed euros. Up to now ECB’s Governing Council, including its two German members, has unanimously undersigned Mario Draghi’s open market policy proposals (more liquidity to the economy), amounting to euro one trillion. Yet, Germany blocks the application of these monetary measures.

During the last few weeks the ECB has distributed some euro billions under two new programmes. By 5 December the Asset Backed Securities Purchase Programme (ABS PP) amounted to a mere €600 million and the Covered Bond Purchase Programme (CBPP3) to €21bn. This is nothing though compared with the target ECB set in October to flood the euro area financial markets with a trillion.

The ‘wonders’ of 2010 and 2012

It’s also nothing compared to the Securities Markets Programme (SMP), initiated on 10 May 2010 and terminated in September 2012, after having reached €144bn. That was something. But for whom? According to ECB, the SMP was introduced “with a view to addressing the severe tensions in certain market segments which had been hampering the monetary policy transmission mechanism”. The real reason behind the SMP was to save some almost bankrupt giant EU banks, who had lent imprudently hundreds of billion to failing Greece. ECB didn’t restrict its SMP purchases only to Greek debt. It also acquired Italian, Irish, Portuguese and Spanish paper.

At that time Berlin didn’t just support ECB’s decision. It pressed hard for it. You see, it was the ‘health’ of the German banks that was at stake, and Wolfgang Schäuble didn’t mind much, if this policy was probably outside ECB’s mandate. To be reminded that the central bank then bought sovereign bonds at the secondary market. In this way it supported the price of the relevant paper and also helped Italy and Spain to borough cheaply in their primary debt market.

The German double standards

The German government had also no serious objection in the summer of 2012, when the ECB intervened to save once more the euro area. It was on 6 September 2012 when ECB initiated the famous for their unquestionable success Outright Monetary Transactions. It was the time when Mario Draghi said the era changing phrase, “the ECB will do whatever it takes to save the euro, and believe me it will be enough”. Under the OMTs the ECB announced that it was ready to buy unlimited quantities of sovereign bonds, in order to save the euro area from melting down.

Everyone remembers those dreadful times. Banks and governments run the danger to go bankrupt together, at the helm of the second Greek crisis. The Greek virus has infected the entire south Eurozone and not only. However, it was again primarily the major European banks, with the German ones at their forefront, which had to be rescued first. The impressive result was that the sovereign debt markets evened out and actually the yields fell, without the ECB having to spend not one euro. Just the decisiveness of the statement was enough to stabilize the markets at much lower levels interest rate wise.

Teutonic stubbornness

Currently, ECB and Draghi are again contemplating to intervene in the sovereign debt market, but this time not to save the Eurozone from falling apart. The odds are not that precarious; at least not yet. The problem is that Eurozone is caught in a disinflation (falling or too low inflation) and stagnation trap, which may evolve into a new recession. In such an environment, the abrupt fall of the energy prices may drag all prices deep into the negative area. Then things may become really precarious. Energy is incorporated in every product or service.

The Wall Street Journal reported yesterday, that the head of the Organization of Petroleum Exporting Countries, Abdalla Salem el-Badri as saying that OPEC has not set a price target for crude oil. Other sources say that OPEC is willing to allow crude oil prices to fall even to $40 a barrel. This means crude oil, the most precious commodity, is losing the largest part of its value within weeks.

Money matters

Understandably, under different circumstances this development would have been a benediction for the oil consuming Eurozone. Unfortunately, such a sudden drop of the price of energy may introduce a chain reaction of the price structure and demolish the entire edifice. It may drag Eurozone in the abyss of deflation (negative inflation, constantly falling prices). In such an eventuality, the euro area, with unemployment already stuck in the double digits region and growth rates close to zero, would fall victim of its inability to seize the opportunities in the changing horizons of the energy universe.

Inflation may dive into the negative part of the chart, without an apparent presence of adequate backstops, like a possible effective increase of consumption and investment spending, as in the US. Despite all that, Germany still champions austerity and blocks the ECB from buying sovereign bonds at significant quantities, so as the Eurozone member state governments could support investment and consumption in their territory. Only in this way the euro area can avoid a new and much more dangerous recession.

The trouble is that now things evolve very fast. If the much-needed ECB’s intervention to help member states with their liquidity problems is further delayed, the crisis will certainly catch up. Then even additional trillions, than the one planned to be printed, may prove not enough to save Eurozone from a new calamity. For Eurozone to avoid that, Germany should allow Draghi to print and distribute at least the one trillion, as ECB has already decide, and be it rather fast, within the first months of 2015. Otherwise the economic and political repercussion would be catastrophic.

 

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

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

State aid: Commission approves German scheme for very high capacity broadband networks in Bavaria

Why the euro may rise with the dollar even at lower interest rates

Can the EU really make Google and Facebook pay publishers and media?

Member States’ compliance with EU law in 2018: efforts are paying off, but improvements still needed

One in three Venezuelans not getting enough to eat, UN study finds

The climate and COVID-19: a convergence of crises

Reforms in Lithuania are reinforcing economic growth but boosting productivity is still a challenge

Teenage girl’s death sentence spotlights Sudan’s failure to tackle forced marriage, gender-based violence – UN rights office

Rohingya crisis: EU allocates €31 million for Bangladesh and Myanmar

Turkey: MEPs cut support by €70m due to no improvement in respect for EU values

Draghi drafts a plan to donate more money to bankers, the era of ‘money for nothin’ is flourishing

THE COMMITTEES: ‘All roads lead to the Fifth’

European Youth calls on European Council for urgent action on “humanitarian crisis” and questions the EU/Turkey deal respect of human rights

State aid: Commission invites comments on State aid rules for the deployment of broadband networks

Trump and Brexit: After the social whys the political whereto

28 million elective surgeries may be cancelled worldwide: how non-COVID-19 medical care is suffering

Coronavirus: 23 new research projects to receive €128 million in EU funding

Combat against devastating effects of tobacco can only be won ‘if the UN stands united’ – UN health official

Help African farmers cope with climate change threats, UN food agency urges

This entrepreneur built an island resort out of plastic waste

UN chief laments ending of Cold War-era disarmament treaty

The role of junior entrepreneurs as a bridge between academia and business world

Switzerland has the most highly skilled workers in the world. This is why

EU confronts environmental threats as global leaders attempt to revive the global sentiment at NYC climate week

Britain and Germany change attitude towards the European Union

UN announces roadmap to Climate Summit in 2019, a ‘critical year’ for climate action

Why global collaboration is needed to protect against a new generation of cyber threats

Turning Europe into a giant wind farm could power the entire world

The India–U.S. trade dispute and India’s evolving geopolitical role

The third bailout agreement for Greece is a done deal amid European economies full of problems

Malaysia has achieved high levels of growth, but must do more to address governance and social challenges

International partners pledge $1.2 billion to help cyclone-hit Mozambique recover, ‘build back better’

Sassoli to EU governments: Rise to the challenge. Find new shared ways to finance our recovery

World must avoid a new Cold War, UN chief tells economic forum in Russia

Berlin cannot dictate anymore the terms for the enactment of the European Banking Union

Central American migrants must be protected, urge UN experts

UNICEF must triple budget to combat Ebola outbreak in DR Congo; complex crisis impacting unprecedented number of children

COVID-19 is a threat to waste pickers. Here’s how to help them

A Glimpse into the Future of the Health with Mobile Technology

Digitalization is changing banking – These 3 trends will help shape its future

What is environmental racism?

Federalist EU ‘naively’ believes Washington shares her TTIP high fever

Children in crisis-torn eastern Ukraine ‘too terrified to learn’ amid spike in attacks on schools

Right2Water initiative: Is the Commission ready to listen to citizens?

5 amazing schools that will make you wish you were young again

The world’s most vulnerable must be protected: WHO briefing

‘By no means is this over’: WHO briefing

Top UN official urges Russia and Ukraine to step away from further confrontation at sea

EU legislation protecting home buyers approved in Parliament

How Britain’s backyard bird feeders are shaping evolution

Draghi keeps the euro cheap, helps debt refinancing, recapitalization of banks and growth

Joint statement following the 22nd EU-Ukraine Summit, 6 October 2020

EU Trust Fund Bêkou for the Central African Republic extended until 2020

EU Top Jobs summit ended with no agreement: welcome to Europe’s quicksand!

Wednesday’s Daily Brief: updates from the Near East and Libya, Ebola in DR Congo, World War remembrance

China in My Suburbs

Cultural Intelligence: the importance of changing perspectives

MFF: Commission’s plan “impossible to implement” with Finnish proposal

Nicaragua must end ‘witch-hunt’ against dissenting voices – UN human rights experts

Strong multilateral institutions key to tackling world’s dramatic challenges, UN chief says In Moscow

More Stings?

Advertising

Comments

  1. Reblogged this on bloggerboii14.

  2. Massive QE in USA, UK, Japan hasnt given them any growth, as it wont in eurozone. Its a massive illusion which redistributes wealth for the benefit of a few. Debasing money for the (real) sole purpose of monetizing debt is pure nonsense.

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