ECB’s €1.14 trillion again unifies Eurozone; Germany approves sovereign debt risks to be pooled

Mario Draghi walks to take his position in ECB’s Press Conference room. (ECB Audiovisual Services, 22/1/1015).

Mario Draghi walks to take his position in ECB’s Press Conference room. (ECB Audiovisual Services, 22/1/1015).

The long-awaited move of the European Central Bank finally came yesterday afternoon. Mario Draghi announced from ECB’s Press room in the Frankfurt tower that the Eurosystem, the central banking system of the euro area, will purchase bonds issued by governments and other European institutions at a rate of around €60 billion a month. Obviously the target is to revive the stagnating Eurozone economy by injecting more liquidity in the financial system, wake up the falling prices and avoid negative inflation and why not lead the euro parity with the rest of major currencies to more competitive levels. On Wednesday the Italian Prime Minister Matteo Renzi, speaking from Davos, said that the ECB has to target the parity between the euro and the dollar.

Germany, despite resenting the extension of the quantitative easing program to include government bonds she finally said ‘yes’. Berlin insists though that the ECB by buying sovereign debt from the big spenders of the south will dilute the will of those governments to restructure their economies by introducing unpopular ground-breaking measures to make their countries more competitive. This time however Berlin limited itself to pointing the risks but didn’t block the program of government bond purchases.

Draghi asks the politicians

Of course Draghi himself shares the opinion that politicians have to do more. He has stated that “Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to strengthen investment activity, boost job creation and raise productivity growth, other policy areas need to contribute decisively. In particular, the determined implementation of product and labour market reforms as well as actions to improve the business environment for firms need to gain momentum in several countries. It is crucial that structural reforms be implemented credibly and effectively as this will raise expectations of higher incomes and encourage firms to increase investment today and bring forward the economic recovery”.

But takes the right actions

Such measures however present insurmountable political problems and their introduction may lead to uncharted waters. Italy and France are already in the political danger zone. Marine Le Pen’s National Front has gained momentum and she aspires to contest the Presidential election in 2017, while the Beppe Grillo’s Five Star Movement is the largest political party in Italy and he is a comedian.

Not to say anything about Greece, where the unpopularity of the austerity and the reform policies imposed on the poor country during the past five years led to present day problems. The polls now predicting SYRIZA, a left-wing party with an extremist  group segment, to gain the first place in this Sunday’s election. It’s the same in Spain where the popularity of the unconventional left-wing Podemos movement is skyrocketing.

Political impossibilities

In view of all that Draghi had to act, because the politicians are unable to perform their part. Nonetheless, he decided to do what every other central banker in the developed world does. He had to go ahead in order to save Europe from the phantoms of stagnation and deflation that may lead to an unprecedented recession. The central bankers of the US and Britain started buying government bonds right after the financial crisis of 2008-2009 and both those economies are now growing at decent rates. The Bank of Japan is doing exactly the same for some months now, but with poor results just because it delayed its action.

In short Draghi announced yesterday a program of purchases of government and private sector bonds of €60 billion a month starting from March 2015 and going up to September 2016. This means the ECB will spend around €1.14 trillion until inflation moves upwards close to the benchmark target of 2%. This is more than the financial markets expected and as a result the euro/dollar rate dived abruptly yesterday afternoon towards 1.14. Understandably the more money the ECB says it will print and circulate the less its foreign value will be.

Cheaper euro will help

Of course the cheaper euro will surely help all Eurozone countries to export more products and services and thus help their economies start growing again. France and Italy have being asking for a cheaper euro for years. As noted above, Matteo Renzi observed from Davos that a one to one parity between the American dollar and the euro is needed to support the ailing economy of his country. Apart from the cheaper euro, Draghi’s announcement had instantly one more positive effect. The yield of the Italian and Spanish debt paper fell rapidly. The rate of return on the Italian ten-year bond dropped to 1.59% and for the Spanish title to 1.44%. This means that the two governments can now borrow in the capital markets at lower interest rates.

Draghi also managed to keep the government bond purchases program centrally financed by the ECB itself, and not by the national central banks. In this latter case the hypothetical losses would have been decentralized and borne by the national banks and ultimately by the governments which were supposed to be supported by this program. In such a case the Eurosystem would have started to fall apart. According to the decision of ECB’s Governing Council however the only case that loss sharing would not really occur, is in the case of additional purchases by national central banks of assets issued by European institutions, like the European Investment Bank or the European Stability Mechanism.

Draghi was adamant about that. He said plainly “The ECB will buy bonds issued by euro area governments, agencies and European institutions in the secondary market against central bank money…”. In reality this means the ECB is to acquire, pool and hold sovereign credit risks from all over the Eurozone. Truly this is not very different from a Eurobond because in both cases the risks are mutualised. It’s even more interesting that the German reaction to this new program was restricted to the timing of its application. Draghi explained that the conceptualisation of the package was unanimous in the Governing Council, while only the timing of its realisation was decided by a majority, so massive that the issue was not needed to be put on a vote.

All in all it seems that Berlin finally understood that the Eurozone has been created for everybody and not only for Germany.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

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

Guterres says UN stands ready to support Brazil’s search and rescue effort in wake of tragic dam collapse

Australia needs to intensify efforts to meet its 2030 emissions goal

UN working ‘intensively’ to stop Ebola in eastern DR Congo, following second case in major border town

Climate change and health: creating global awareness and using earth resources wisely

The 100-year climate catastrophe of Mont Blanc

Is the ECB ready to flood Eurozone with freshly printed money?

Algorithms are being used to convict criminals and decide jail time. We need to make sure they are fair

Why are the financial markets shivering again?

‘Fire-fighting approach’ to humanitarian aid ‘not sustainable’: Deputy UN chief

AIDEX 2015: Humanitarian Hero Award Winner Announced

3 ways to use digital identity systems in global supply chains

These are the OECD’s most productive economies

World ‘off track’ to meet most Sustainable Development Goals on hunger, food security and nutrition

Despite setbacks, ‘political will’ to end Yemen war stronger than ever: top UN envoy

An Easter Special: Social protection of migrants in Europe as seen through the eyes of European youth

‘Global sisterhood’ tells perpetrators ‘time is up’ for pandemic of violence

‘Address root causes’ of instability in Mali through ‘aid and support’ urges UN chief

In Christchurch, UN chief calls for tolerance, solidarity to extinguish ‘wildfire’ of hate speech

UN’s Bachelet rejects Sri Lankan official’s ‘spin’ on Human Rights Council encounter, urges reforms

Leaders need hard data to make the hard decisions about sustainability

Scientists now think air pollution is fuelling violent crime

EU budget for 2021-2027: Commission welcomes provisional agreement on Horizon Europe, the future EU research and innovation programme

What does the world really think about the UN Sustainable Development Goals?

‘Forgotten crisis’ in Cameroon, with attacks on the rise, millions in need of ‘lifesaving assistance’

UPDATED: Thousands flee fighting around Libyan capital as Guterres condemns escalation, urges ‘immediate halt’ to all military operations

Draghi will not hesitate to zero ECB’s basic interest rate

Canada has the most comprehensive and elaborate migration system, but some challenges remain

Mali just took a huge step towards universal healthcare

Thursday’s Daily Brief: Climate emergency, call to support breastfeeding, rising political heat and new investigation board for Syria

3 ways activists are being targeted by cyberattacks

Meet Cipta: the comic book hero using her powers to tackle bullying in schools

UN and partners appeal for $920 million to meet ‘dire needs’ of Rohingya refugees

Africa-Europe Alliance: two new financial guarantees under the EU External Investment Plan

UN rights chief ‘alarmed’ by upsurge in attacks against civilians in Syria’s Idlib

Bank resolutions to remain a politically influenced affair

As inequality grows, the UN fights for a fairer world

We need greater protection for our oceans. We can’t let politics stand in the way

Why schools should teach the curriculum of the future, not the past

Somalia: UN congratulates Puntland region’s newly-elected President

Syria: UN chief warns Idlib offensive may set off ‘humanitarian catastrophe’

Obama turns the G20 summit into warmongering platform

UN chief condemns explosion at election rally in Zimbabwe that injured dozens, including senior politicians

European Parliament the most trusted EU institution

‘Provocative actions and inflammatory rhetoric’ destabilizing Middle East, warns top UN official

Global economy: ‘we must do everything possible’ to avoid global ‘fracture’ caused by US-China tensions, urges Guterres

UN rights office appeals for peaceful Zimbabwe elections amid reports of intimidation

Glasgow and Edinburgh race to become the UK’s first net-zero emissions city

Ten reasons to be optimistic in 2019

Timor-Leste Foreign Minister highlights value of UN in resolving conflicts

Earth Hour 2019: switch off your lights, and become an innovator

Children who exercise have more brain power, finds study

Thursday’s Daily Brief: Safeguarding civilians, strengthening Ebola response in DR Congo, marking Fistula Day, updates on CAR and Syria

North Koreans trapped in ‘vicious cycle of deprivation, corruption, repression’ and endemic bribery: UN human rights office

These are the world’s most future-proof cities

EU-India summit: Will the EU manage to sign a free trade agreement with India before Britain?

Budget Committee backs €2.3 million worth of aid to help 550 redundant media workers in Greece

The South China Sea Arbitration: Illegal, Illegitimate and Invalid

The undead banks

Fossil fuel support is rising again in a threat to climate change efforts

More Stings?

Comments

  1. The Fury of a Patient Man says:
  2. My sister advised I might perhaps this way web page. He / she was totally suitable. The following distribute definitely made the morning. You actually cann’t imagine just just how so much occasion I needed put in due to this information! Thanks a lot!

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