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.

 

the sting Milestones

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

LGBTQ+: The social evolution of a minority

Our healthcare systems are ailing. Here’s how to make them better

EU and China to do more in common if the global scene gets worse

White Coat, Stained red

Less than half of EU travellers are aware of EU Passenger Rights

How Japan and Singapore are reinventing old age

3 things the G20 can do to save the World Trade Organization

EU-Belarus: MEPs back agreements on readmission and visa facilitation

How is the global economy fairing 11 years after the financial crisis?

Cities are especially vulnerable to COVID-19. These organizations are leading the urban response.

Eurozone: In vicious cycle of disinflation and unemployment?

ECB embarks on the risky trip to Eurozone banking universe

We underestimate the power of data at our peril. This is why

Measles ‘misinformation campaigns’ through social media, fuel rising toll

Parliament: Last compromise on bank single resolution mechanism

Health services for Syrian women caught up in war, foster safety and hope: UNFPA

Record-breaking heatwaves killed about 1,500 people in France

Five ways to increase trust in e-commerce

China is now heavily endorsing its big investment flow in the Central Eastern European (CEE) countries

Turkey: Extension of EU humanitarian programmes supporting 1.7 million refugees receives green light

How Eurozone consumers spend their income when they have one…

The real cost of addiction

DR Congo: With Ebola on the wane, UN agencies prepare to combat coronavirus

A Sting Exclusive: Paris Climate Change Summit, a defining moment for humanity, by Ulf Björnholm Head of UNEP Brussels

Investment and Financing under the Belt and Road Initiative (BRI): EU and Chinese stakeholders share their views at European Business Summit 2018

Record numbers of people in the UK have applied to study nursing

These are the regions where people have most faith in their schools

The impact of COVID-19 on the life of the elderly

Iraq: UN demining agency rejects desecration accusations, involving historic Mosul churches

Wolfgang Schäuble: “Without European unification, there would be no German unity”

“Be aware where you put your I Agree signature on and something else”; now Facebook by default opts you in an unseen private data bazar

EU allocates €50 million to fight Ebola and malnutrition in the Democratic Republic of Congo

Taxes on polluting fuels are too low to encourage a shift to low-carbon alternatives

Banks launch green charter to help shipping reduce its carbon footprint

Peacekeeping chief highlights challenges facing UN Police

Why exchange programs are essential for the medical students of the 21st century

The moment of truth for global energy transition is here

Energy: EU priority projects should be aligned with 2050 climate objectives

UN rights chief ‘extremely concerned’ over deadly crackdown on protesters in Iran

Colombia: New Congress marks rebel group’s transition ‘from weapons to politics’, says UN

Thousands of health professionals call on world leaders to prioritize a greener future, post-pandemic

European Citizens’ Initiative: Commission decides to register ‘Right to Cure’ initiative

Our present and future tax payments usurped by banks

It’s time for financial services to embrace the Fourth Industrial Revolution. Here’s why

Future Africa-Caribbean-Pacific States/EU Partnership: “Post-Cotonou” negotiations resume at ministerial level

Menu for change: why we have to go towards a Common Food Policy

The new ethical dilemmas in medicine of the 21st century

What talent means in the post-COVID-19 workplace

European Parliament calls on Russia to end occupation of Georgian territories

What is blockchain and what can it do?

World Economic Forum CEO Climate Leaders call for continued action toward net-zero emissions

EU Parliament shows its teeth in view of 2014 elections

Lorenzo Natali Media Prize 2019: winners of EU’s development journalism award unveiled

Here’s how to achieve growth in the Middle East and North Africa

Murder of Brazilian indigenous leader a ‘worrying symptom’ of land invasion

How technology is leading us to new climate change solutions

Fighting Depression In the Isolation of COVID-19

An expert explains: the digital risks facing our children during COVID-19

Silk Road Unlimited

The UK option: An overarching alternative for the whole Brexit options

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