Can ECB’s €60 billion a month save Eurozone?

Jyrki Katainen, Vice-President of the EC in charge of Jobs, Growth, Investment and Competitiveness (on the left), and Pierre Moscovici, Member of the EC in charge of Economic and Financial Affairs, Taxation and Customs, gave a joint press conference on the autumn economic forecasts for 2014-2016. Real GDP growth is estimated at 1.3% in the EU and 0.8% in the euro area for 2014 as a whole. Growth is expected to rise slowly in the course of 2015, to 1.5% and 1.1% respectively, while an acceleration of economic activity to 2.0% and 1.7% respectively is predicted for 2016. Understandably growth expectations are always inflated in deflationary times by the politicians ‘in charge’. (EC Audiovisual Services).

Jyrki Katainen, Vice-President of the EC in charge of Jobs, Growth, Investment and Competitiveness (on the left), and Pierre Moscovici, Member of the EC in charge of Economic and Financial Affairs, Taxation and Customs, gave a joint press conference on the autumn economic forecasts for 2014-2016. Real GDP growth is estimated at 1.3% in the EU and 0.8% in the euro area for 2014 as a whole. Growth is expected to rise slowly in the course of 2015, to 1.5% and 1.1% respectively, while an acceleration of economic activity to 2.0% and 1.7% respectively is predicted for 2016. Understandably growth expectations are always inflated in deflationary times by the politicians ‘in charge’ Unfortunately for them the future quickly becomes a disappointing present. (EC Audiovisual Services).

The European Central Bank as from this March will start pumping into the Eurozone economy extra liquidity of €60 billion a month of freshly printed money. The details of this extraordinary policy measure will be revealed tomorrow Thursday by Mario Draghi the President of ECB, in his regular Press conference after the Governing Council meeting which is to be convened this time in Cyprus. This is the last-ditch shot to perk up growth and reverse the very low or negative inflation rates that prevail in euro area. In detail, according to the celebrated 22 January announcement by ECB’s Governing Council, the euro area central bank is expected to commence its “expanded asset purchase program to include bonds issued by euro area central governments, agencies and European institutions”.

Purchases of such securities will amount to €60bn a month and the program is “intended to be carried out until at least September 2016” or until the headline inflation reaches the institutional target of close to 2%. Currently annual inflation has plunged to the negative area of the chart. But is the euro area economy ready to take full advantage of that? Or, are the banks in a position and willing to pass this new money bonanza to the real economy? Let’s try to answer these questions.

Can the banks do it?

According to the eligibility criteria as they have been set by the ECB, state bonds to be purchased must have a “minimum remaining maturity of 2 years and a maximum remaining maturity of 30 years”. Understandably, this condition forbids direct government financing with ECB money, as dictated by the central bank statutes. At the same time it also means though that all those purchases of bonds will be effectuated in the secondary markets, and quite predictably all the large systemic banks won’t miss the opportunity to unload a good part of the government debt they hold for cash and transfer it to the central bank.

Not to forget that almost all the systemic euro area banks are thirsty for quick profits, that can boost their meager own capital reserves. Invariably then they will all be tempted to use this extra cash for risky ‘investments’ in the shadow banking universe which could fetch high returns. This is a ‘game’ the big lenders know very well because they have invented it themselves. This is exactly what brought the developed world to its knees during the 2008-2010 financial melt-down. By the same token almost all the major euro area banks have developed anorexia for their traditional trade of lending money to the real economy and the SMEs.

Where will all that money end up?

There is more to it though. In the face of it, this new extraordinary liquidity injection is theoretically directed mainly to those euro area countries, where ECB’s years long cheap money policy is partially or not at all transmitted. Therefore an easing of financial conditions is mostly needed there. As a matter of fact though the transmission mechanism of this new ECB extraordinary measure remains the same and comprises exclusively the lenders in those member states.

Unfortunately the banks in the crisis stricken south Eurozone nations and Ireland are in a much worse position than their counterparts in the core euro area countries. Consequently their ability to support the real economy by lending money to businesses and consumers is thus very much questionable. So, in those member states it will be a high risk bet if the new ECB liquidity will end up supporting the real economy. It is questionable then if “the institutions that sold the securities can use…the central bank money…to buy other assets and extend credit to the real economy” as the ECB maintains.

The demand side for loans

Now let’s turn to the economy’s ability to take full advantage of the new money injections or to put it differently, the demand for loans side. Fortunately in this respect it seems that something started moving in the right direction. The first good news for quite some time broke out last Monday, when the Eurtaost, the EU statistical service announced that the February inflation rose to -0.3% from -0.6% in January. It might be just three decimal points of a percentage unit but it represents a write off of half the previous negative inflation reading.

Some inflation needed

As every first year student of economics knows, a bit more inflation means a bit more growth albeit nominal. However in the current conjuncture the cliché may be rephrased to ‘let it be growth even if it is in nominal terms’. Nobody can be hurt by a few percentage units of inflation if it is accompanied by real growth. Not to forget that the Eurozone grew by a positive 0.3% during the fourth quarter of 2014, and at that time inflation was also positive around 0.2%. This means that growth by no means is to trigger inflation in Eurozone. The inverse is actually true that is some inflation would help growth, despite the Teutonic cathexis for the opposite.

So let’s hope that those €60bn a month from the ECB, injected into the euro area economy, even in a restricted way, will awake the price system by bringing about some more demand and in this manner enliven real growth.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

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

Libya: EU efforts should focus on protecting migrants, MEPs say

This new way of understanding disease is changing medicine

Action needed to end deadly clashes between African herders and farmers: UN chief

The four top Americans who flew to Europe perplexed things about Trump’s intentions

“A Junior Enterprise is run only by students.. there are no professors or managers that can help you solve your problems”

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

Africa-Europe Alliance: first projects kicked off just three months after launch

The German automotive industry under the Trump spell

Fight against climate change and poverty will fail without overhaul of global financial system, says major UN report

Eurozone closer to a deflation – stagnation trap

Why Commissioner Rehn wants us all to work more for less

Syrian Refugees in Germany face distinctly different challenges than those in Lebanon

Consumers suffer three defeats

Is a full course lunch, a new Commissioner and 2 million anti-TTIP citizens what you would call a “Fresh Start”?

What we take for granted: The EU is not perfect

Who the US and China have trade disputes with

EU makes key TTIP document public as protests get louder

ILO’s Bureau for Employers´Activities to publish new study on women in business and management

3 autonomous vehicle trends to follow in 2019

Second Facebook-Cambridge Analytica hearing: impact on privacy, voting and trust

This is what a planet-wide network of ocean sanctuaries could look like

EU budget: the Common Agricultural Policy beyond 2020

‘Global care crisis’ set to affect 2.3 billion people warns UN labour agency

Guatemala: UN anti-corruption body will continue working, as Constitutional Court blocks Government expulsion

COP21 Breaking News_03 December: Unprecedented Global Alliance for Buildings and Construction to Combat Climate Change

Why the ECB prepares to flood the markets with more and free of charge euro; everybody needs that now

This is our chance to completely redefine the meaning of work

Greece and Ukraine main items on EU28 menu; the course is set

Eurozone: The crisis hit countries are again subsidizing the German and French banks

The Indian miracle state pointing the way to global sustainability

EU Commission: Germany can make Eurozone grow again just by helping itself

Chinese Premier Li Keqiang’s speech from World Economic Forum’s Annual Meeting of New Champions

Press coverage of migration crisis in Europe: a call for collaborative action

Parliament demands ban on neo-fascist and neo-Nazi groups in the EU

Climate change recognized as ‘threat multiplier’, UN Security Council debates its impact on peace

2 trillion drinks containers are made every year – so where do they go?

Water supply a human right but Greeks to lose their functioning utilities

Darfur: Inter-communal tensions still high despite improved security, Mission head tells Security Council

Brexit: when the hubris of one man can set the UK, the EU and the entire world on fire

Marking Sir Brian Urquhart’s 100th birthday, UN honours life-long servant of ‘we the peoples’

Mandela, ‘true symbol of human greatness’, celebrated on centenary of his birth

ECB’s first flight in Eurozone’s banking universe will be just a reconnaissance

Syria: ‘Violence, displacement’ and cold kill 11 infants ‘in the past two days’

Tuesday’s Daily Brief: Bicycles for the environment, new leader for the UN General Assembly, UN values, Ebola, Syria and Libya

EU-China Light Bridge in Brussels signals the bright coming of the Year of The Dog

‘Never give up’: UN chief urges all who serve, marking UN Day

Venezuela: UN human rights office calls for ‘maximum restraint’ by authorities in face of new demonstrations

The EU Commission does nothing about the food retailing oligopoly

MEPs want to ensure sufficient funding for Connecting Europe’s future

We need to talk about failure in the social sector

Long live Eurozone’s bank supervisor down with the EU budget supremo

Why Obama asks approval from Congress to bomb Syria?

UK voters sent strong message to May and Corbyn for soft Brexit

COP21 Breaking News_05 December: Ban Ki-Moon Closing Address at COP21 Action Day Innovation, Imagination, Faster Climate Action

The 28 EU leaders show contempt for the European Elections results

WEF Davos 2016 LIVE: “No other problem has jeopardised the EU as much as the refugee question” Joachim Gauck, President of the Federal Republic of Germany, cries out from Davos

Love unlimited

Medical students of today, technological doctors of tomorrow

Why Eurozone urgently needs the ECB to print and distribute at least €500 billion

European Youth Forum welcomes the European Commission’s proposed revision of the Union Code on Visas, however it does not go far enough

More Stings?

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