More billions needed to help Eurozone recover; ECB sidesteps German objections about QE

Eurogroup meeting - March 2015. The 19 Eurozone finance ministers meet on 9 March 2015 in Brussels. The President of ECB Mario Draghi (on the left) participates regularly in these meetings. In this instance he talks with the Jeroen Dijsselbloem, President of the Eurogroup. (European Council - Council of the European Union Photographic Library, 9/3/2015).

Eurogroup meeting – March 2015. The 19 Eurozone finance ministers meet on 9 March 2015 in Brussels. The President of ECB Mario Draghi (on the left) participates regularly in these meetings. In this instance he talks with the Jeroen Dijsselbloem, President of the Eurogroup. (European Council – Council of the European Union Photographic Library, 9/3/2015).

The Eurozone economy has been taking two steps forward and one step backward over the past few months. The minimal increase of the GDP growth rate to 0.4% during the first quarter of this year and the equally small increase of people in employment was accompanied by a fall of industrial production and a decrease of retail sales. All these statistics were released last week with relevant Press releases issued by Eurostat, the EU statistical service.

The uncertain or even precarious character of Eurozone’s recovery prompted Mario Draghi, the President of the European Central Bank, to state loudly that the bank’s quantitative easing (QE) program will not be ended prematurely, “will be implemented in full and continue for as long as it is needed”. To be reminded that the plan which was introduced this March has been designed to last until September 2016. According to this scheme, the central bank prints and injects €60 billion a month into the economy, through government and covered bond purchases. The total amount may reach €1.14tn. Obviously, the target is to support the struggling economy by injecting in it freshly printed money.

Is it a real recovery?

Seemingly, albeit minimal, the increase of the GDP growth rate by just one decimal point of a percentage unit to 0.4% during the first quarter of 2015 from 0.3% in the last quarter of 2014, has impelled some people to question the necessity of new money injections into the financial system. They claim that as the economy is reaching a growth path, there is no need of additional ECB money injections, a policy which may have some unwanted side effects by creating bubbles in certain markets. In view of this, Draghi must have felt he had to intervene. Let’s see who is right.

In Germany, the Ministry of Finance in Berlin and the central bank, the Bundesbank in Frankfurt alike have been opposing this ECB policy of free money distribution since it was initially conceived. No need to wonder why this is so. Germany is the only country with cash reserves reaching the region of at least one trillion euro. Understandably, the low-interest rate policy ECB pursues through those money injections, is undercutting interest returns to the outsized German reserves. That’s why Berlin detests low-interest rates.

A fight for interest rates

By doing that, Berlin appears as not caring much if an increase of the ‘price of money’ could derail the economy of every other Eurozone member state. Jens Weidmann the President of Bundesbank and Wolfgang Schäuble the German Minister for Finance seem to now want to convince everybody that Eurozone doesn’t need any more money injections, because it has now gained a solid growth path. They support this theory just by citing that the GDP grew by one more decimal point during the first quarter of this year. According to this logic, Eurozone doesn’t need any additional liquidity injections from ECB. The untold aim of Berlin is to stop the €60bn a month injections from ECB. If Schäuble and Weidmann manage to achieve that, they hope that interest rates will start increasing again, favouring the German moneybags.

Is the recovery solid?

However, unfortunately for us all, Eurozone doesn’t look like having abandoned the dangerous area of deflation and recession, despite some indications for the opposite. Let’s see why this is so, starting from the positive signs. Eurozone economy is said to be in an upwards path since the second quarter of 2013. Those GDP increases though are quite insignificant in the region of yearly increments in the region of 0.3%. Besides this, there are more indications pointing in the positive direction theoretically, but in reality don’t mean much.

Take for example total employment, which rose in 2014. According to Eurostat, the employment rate of the population aged 20-64 increased last year for the first time in the European Union, after the financial crisis of 2008-2010. In detail however, it kept decreasing all along the five crisis years (2009-2013). Only in 2014 it was measured at 69.2%, slightly up from 68.4% in 2013. Yet it hasn’t reached its 2008 pre-crisis level at 70.3%.

The negative signs

Against these barely positive developments there is evidence that other, equally important macroeconomic variables, point to the opposite direction. Industrial production and retail sales both fell in March. During this month compared with February 2015 industrial production decreased by 0.3% in the euro area. In the same month compared to February this year, the volume of retail trade retreated by 0.8% in Eurozone. Of course those negative occurrences are also limited to a few decimal points, but this is also true for the positive changes.

It’s not right though to put the two positive and the two negative events on a scale and conclude that they balance each other out. It will be wrong then to conclude that Eurozone is in stagnation just because the positive and the negative statistics are offsetting each other. However, neither is it right to conclude that Eurozone has entered a growth path and a return to recession is now out of question. It’s exactly for this reason that Draghi had to remind everybody that the ECB is decisively proceeding with its QE program and doesn’t contemplate to withhold it. Obviously he is convinced that the recovery is still precarious.

The ECB does not back off

In this way the ECB once more makes it clear to everybody, that it is a European institution mandated to act in everyone’s interest. Berlin cannot expect any special treatment favouring its reserves of one trillion euro, at a time when more than half the Eurozone countries are still struggling with employment and recession. Last Friday all European capital markets closed with losses for a good reason. The new rise of the euro against the dollar threatens to reverse the timid recovery of Eurozone, by undermining its exports. Undoubtedly the ECB and the markets know better what is good for Eurozone as a whole than the German politicians.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

UNICEF delivers medical supplies to Gaza in wake of deadly protests

Eurozone: Uncertain future with unemployment ravaging the South

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

High-flyers: China is on top of the world for skyscraper construction

Can the US-Iran rapprochement change the world?

Bram in Colombia

Sweden well ahead in digital transformation yet has more to do

Refugees now make up 1% of the world’s population

EU: Centralised economic governance and bank supervision may lead to new crisis

The hostilities in south and eastern Ukraine resume; where could they lead?

Draghi’s ‘quasi’ announcement of a new era of more and cheaper money

YO!Fest back in Strasbourg for the 2nd edition of the European Youth Event – 20-21 May 2016

The right approach to addressing overcapacity problem from a Chinese perspective

Commission goes less than mid-way on expensive euro

Fed, ECB take positions to face the next global financial crisis; the Brits uncovered

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

Eurozone at risk of home-made deflation and recession

German stock market is not affected by the Greek debt revolution while Athens is running out of time

It’s not your imagination, summers are getting hotter

Superbugs: MEPs advocate further measures to curb use of antimicrobials

TTIP wins first crucial EU test: MEPs give in to the trade agreement

Hostilities in Syria’s southwest, mean cuts in vital aid across Jordanian border: Senior UN official

Air quality: Commission takes action to protect citizens from air pollution

We’ll succeed together

Eurozone closer to a deflation – stagnation trap

This robot has soft hands. It could be the future of sustainable production

ILO warns of widespread insecurity in the global labour market

The European Youth raises their voices this week in Brussels at Yo!Fest 2015

UN chief applauds Bangladesh for ‘opening borders’ to Rohingya refugees in need

The European Sting Cookie Policy

‘Immense’ needs of migrants making perilous journey between Yemen and Horn of Africa prompts $45 million UN migration agency appeal

IMF’s Lagarde: Ukraine must fight corruption

‘Habitual residence’ rules deprive EU workers from social benefits

At Ministerial session, UN regional office in Beirut to focus on technology for sustainable development

Fostering intergenerational solidarity and cooperation through age-friendly environments: the right answer to Europe’s demographic challenge

Cameron postpones speech in Holland

Digital business is Europe’s best hope to get back to growth

Parmesan cheese on shelves in Italy (Copyright: European Union, 2014 / Source: EC - Audiovisual Service / Photo: Daniela Giusti)

CETA at risk again: Italy says it won’t ratify EU-Canada trade deal over product protection fears

If we can build the International Space Station, ‘we can do anything’ – UN Champion for Space

CHINA UNLIMITED. PEOPLE UNLIMITED. RESTRICTIONS LIMITED

COP21 Paris agreement: a non legally-binding climate pact won’t stop effectively global warming while EU’s Cañete throws hardest part to next Commission

Politics needs to “Youth UP” in order the ensure the future of our democracies

Berlin wants to break South’s politico-economic standing

Migration: Commission steps up emergency assistance to Spain and Greece

Merkel refuses to consider the North-South schism of Eurozone

UN chief welcomes ‘first concrete step’ in normalizing Eritrea-Ethiopia relationship

A young person’s perspective on the Paris and Beirut attacks and aftermath

Eurozone in trouble after Nicosia’s ‘no’

The end of the 404? Why we need to repair the internet’s crumbling infrastructure

JADE Romania Celebrates the 4th Anniversary

Why growth is now a one way road for Eurozone

European Commissioner for Youth wants young people to be at heart of policy making

China and China-EU Relations in the New Era

Only the Americans are unhappy with the ceasefire agreement in eastern Ukraine

The Stray

China in my eyes

Charles Michel advocates a strong Europe that acts where it can add real value

UN warns of ‘deteriorating climate’ for human rights defenders in Guatemala

Shinzō Abe, on the right, and Jean-Claude Juncker at EU-Japan Summit in Tokyo last week. (Copyright: European Union, 2018 / Photo: Etienne Ansotte)

EU and Japan ratify first FTA ever to include Paris Climate Agreement provision

G20 LIVE: G20 Antalya Summit in Numbers, 15-16 November 2015

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