Are ECB’s €500 billion enough to revive Eurozone? Will the banks pass it to the real economy?

Frans Timmermans, First Vice-President of the EC in charge of Better Regulation, Inter-Institutional Relations, the Rule of Law and the Charter of Fundamental Rights, Valdis Dombrovskis, Vice-President of the EC in charge of the Euro and Social Dialogue, and Corina Creţu, Member of the EC in charge of Regional Policy, went to Riga where they participated in a debate about the future of Europe at the "Riga Latvian Society House". The event was hosted by the first Latvian Presidency of the Council of the EU. (EC Audiovisual Services, 08/01/2015).

Frans Timmermans, First Vice-President of the EC in charge of Better Regulation, the Rule of Law and the Charter of Fundamental Rights, Valdis Dombrovskis, Vice-President of the EC in charge of the Euro and Social Dialogue, and Corina Creţu, Member of the EC in charge of Regional Policy, went to Riga where they participated in a debate about the future of Europe at the “Riga Latvian Society House”. The event was hosted by the first Latvian Presidency of the Council of the EU. (EC Audiovisual Services, 08/01/2015).

The major indicators that an economy is in recession and probably heading to something worse like a crisis, are falling prices and crumbling wages. Eurozone suffers of both of them. According to Eurostat, the EU statistical service, the annual growth of labour cost dropped in the euro area to 1.3% during the third quarter of last year, compared with 1.4% in the April-June period. As for the consumer price developments, the same source published last week its flash estimate for December inflation, finding it below the zero line at -0.2%. It just descended to the negative area for the first time after the summer of 2009, right at the heart of the then free raging financial crisis. Let’s take one thing at a time.

Labour cost, despite the fact that it contains charges not related to the workers’ take home pay it’s a very reliable indicator of it. Take home pay is what it counts when discussing the growth potential of an economy. Obviously consumption expenditure, the largest part of GDP and the strongest driver of growth, is tightly related to workers’ take home pay. In the case of Eurozone the overall level of wages and consequently the level of take home pay stagnate for quite some time now. By the same token, nominal hourly labour cost in the business sector of Eurozone’s economy also oscillates around a percentage unit for four quarters in a row, from the third quarter of 2013 up to the same period of 2014. It becomes evident that all along this period the positive changes of these crucial variables measuring take home pay are quite negligible. That’s why economic growth in Europe is also insignificant.

Stagnant wages and negative inflation

Price developments (aka inflation), the other indicator of growth, are also frustrating. After last June the yearly rate of change of the relevant index in Eurozone remained below the 0.5% benchmark and on a monthly base it became negative (-0.2%) in November. Even worse, as mentioned above, the next month Eurostat found that the December inflation was negative also on the yearly base.

Inflation and wages are not the only crucial economic variables which indicate that economic recession has taken grip of the euro area. Industrial production is equally disappointing. In most euro area countries industrial production keeps falling for many years. Germany was an exception. Unfortunately not any more. According to the Federal Statistical Office of Germany, factory orders dropped by 2.4% in November in comparison with the previous month. The fall was judged to be lower than the analysts expected.

Can the devalued euro help Eurozone?

In view of all that last Friday, the euro fell below 1.176 against the American dollar. Under different circumstances this could have set the Eurozone economy in motion. Regrettably, it seems though that the fall of the international value of the euro is not enough to act as a growth catalyst for Eurozone. The rest of the world is not in a much better shape and cannot increase noticeably its demand for European products. So growth in euro area has to be internally propelled. As a result, the single European currency is expected to fall further. There are wild predictions about parity with the US dollar within this year.

ECB to print more euros

Of course the descent of the euro is related not only to the bleak economic prospects of Eurozone, but also to the expectation of more quantitative easing by the European Central Bank. Last Thursday the European Sting writer Suzan A. Kane reported that “This week more indications emerged pointing to the possibility that the European Central Bank is to announce a government bond purchases programme sooner than expected”.

Reportedly, this means the ECB can very soon print up to €500 billion and throw it in to Europe’s financial markets. The more paper money spins around the less it’s real value is. Undoubtedly then the euro will continue to devalue in relation to the dollar and the British pound. The question is if this extra money is enough to revive Eurozone’s real economy. The US central bank, the Fed, had to print $4 trillion in order to help the American economy start growing again. Many analysts think that half a trillion euro is too little too late to restart the European economy. Predictably, it will be directed to the secondary markets of state debt, where the giant banks – mainly German and French – are lurking. The banks will quite happily unload their investments on government bonds for the much cherished cash freshly printed by the ECB and handed to them.

Again the banks to get it first

Theoretically, this ECB’s new policy measure will help the Eurozone governments and the business sector to borrow cheaply in order to finance new investments. However, as in the recent past, the question remains, up to what point are the giant European banks going to use this extra liquidity to lend more money to the real economy? A large part of it will be used to finance the banks’ own ‘investments’ in risky markets, like the derivatives or developing world financing, where the lenders expect to make quick and large profits.

In short, the dimensions of the positive impact this new ECB’s half trillion handed to banks is to have on the real economy again depends on the good will of the banks. Can the ECB force them to act according to the interests of the entire society and not use the new money for their own ‘investments’? Unfortunately the answer is rather not.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

The next 48 hours may change the European Union

A young European voice on Grexit: too high a bill and too big a deal!

Migration crisis update: lack of solidarity not only among EU leaders but also EU officials

EU and India re-open talks over strategic partnership while prepare for a Free Trade Agreement

JADE Testimonial #1: Marcello @ Enlargement

EU agrees on Ukraine – Georgia visa-free travel amid veto risks and populist fears

ITU Telecom World 2016: it’s all about working together

Schengen is losing ground fast revealing Europe’s clear inability to deal with migration crisis

Eurobarometer: Not a single answer about what the Banking Union will cost to citizens

Eurozone examines the prospect of issuing debt paper jointly

Will Merkel ever steer the EU migration Titanic and restore her power in Germany?

COP21 Breaking News_09 December: List of Recent Climate Funding Announcements

CDNIFY @ TheNextWeb 2014

COP21 Breaking News_08 December: Cities & Regions Launch Major Five-Year Vision to Take Action on Climate Change

Dangerous Trumpism in the Middle East with an anti-European edge

Who threatens the lives and livelihoods of Ukrainians?

Beyond self-regulation: dealing with Europe’s consumption problem

Who cares about the unity of Ukraine?

Commission: Gifts of €6 billion and free trainees to ‘help’ poor employers

Which EU countries have to correct their economic policies?

At the edge of humanity: refugee healthcare in Greece and the EU

Can the EU afford to block China’s business openings to Europe by denying her the ‘market economy status’?

What lessons to draw from the destruction of Syria

Italian voters put again the European Peoples in the Brussels picture

Hostages to a rampant banking system

COP22 addresses a strong global pledge to effectively implement the Paris Agreement

The European Parliament floating over the South China Sea

What UK and EU risk if Brexit “wins” these elections

EU members commit to build an integrated gas market and finally cut dependency on Russia

Extra mild ECB tapering of QE and zero interest rates keep euro low

Greece’s Tsipras: Risking country and Eurozone or securing an extra argument for creditors?

World Health Organisation and young doctors: is there any place for improvement?

To entrepreneurship and beyond!

G20 LIVE: World Leaders in Turkey for G20 Summit. Global Economy will be discussed in Antalya

EU Commission accuses Germany of obstructing growth and the banking union

Search Engine neutrality in Europe in danger: Are 160.000 Google filtering requests good enough?

European Commission determined to conclude EU-Mercosur trade deal this year despite French concerns

Lagarde: Keep feeding the banks cut down wages and food subsidies

The consequences of Brexit seen by a European young entrepreneur

Ukraine-EU deal sees the light but there’s no defeat for Russia

Refugee crisis update: EU still lacks solidarity as Hungary and Slovakia refuse to accept EU Court’s decision

“For my children Italy will be an innovation lab and not a museum”; the Sting reports live from World Economic Forum 2015 in Davos

Merkel refuses to consider the North-South schism of Eurozone

Why the ECB had to clarify it caters for the entire Eurozone not just Germany?

How dearly will Germany pay for the Volkswagen emissions rigging scandal

Medical students: The need for emigration

The British “nonsense”, the relaxed Commissioner and the TTIP “chiaroscuro” at this week’s Council

International World Summit Award calls for outstanding digital applications with impact on society from 178 UN member states

Investing in working conditions and quality jobs

Threats from mammoth banks and Brussels fuel May’s poll rates

Eurozone guarantees all banks with…taxpayers’ money

Crimea, a wicked game of political chess and a ‘big’ coincidence

ECB’s new money bonanza handed out to help the real economy or create new bubbles?

Is Eurozone heading for disinflation?

Cyprus Parliament says no to blackmail

The three sins the EU committed in 2015

Eurozone: Despite anemic growth and shaky banks marks record trade surplus

Ukraine: turning challenges into opportunities


EU sets ambitious targets for the Warsaw climate conference

Will Europe be able to deal with the migration crisis alone if Turkey quits the pact?

More Stings?

Comments

  1. I believe what you said was actually very reasonable. But, consider
    this, what if you added a little content? I am not saying your content is not good, but suppose you added a title to
    possibly grab a person’s attention? I mean Are ECB’s €500 billion enough to revive Eurozone?
    Will the banks pass it to the real economy? – The European Sting – Critical News & Insights on European Politics, Economy, Foreign Affairs, Business & Technology – europeansting.com is a little boring.
    You ought to glance at Yahoo’s front page and see how they create article titles to grab people interested.
    You might try adding a video or a pic or two to get
    people excited about everything’ve written. In my opinion, it would make your website a little livelier.

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