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).

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.