The ECB tells Berlin that a Germanic Eurozone is unacceptable and doesn’t work

Departure and doorstep comments by Wolfgang Schauble, German Minister for Finance, at the Eurogroup meeting of 24 April 2015, in Riga, Latvia. The German minister is Eurogroup’s opinion maker when it comes to serious matters as for example Greece’s position in or out of Eurozone. (European Council - Council of the European Union, Newsroom. Shoot date: 24/04/2015 Riga, Latvia. Snapshot from a video footage).

Departure and doorstep comments by Wolfgang Schauble, German Minister for Finance, at the Eurogroup meeting of 24 April 2015, in Riga, Latvia. The German minister is Eurogroup’s opinion maker when it comes to serious matters as for example Greece’s position in or out of Eurozone. (European Council – Council of the European Union, Newsroom. Shoot date: 24/04/2015 Riga, Latvia. Snapshot from a video footage).

Last week Eurostat, the EU statistical service, confirmed that Eurozone inflation was stuck at zero percent in April, remaining in the region of deflation. No need to mention what a too low or zero or negative inflation means for a stagnating or even receding economy. Add to that the perilous position of Greece in and out of Eurozone, with Germany setting the rules in this game, plus the new and capricious political chapter in Spain which opened after last Sunday’s municipal elections; no wonder why the euro is losing ground and the European capital markets watch their capitalization drifting. Let’s take one thing at a time.

Eurostat’s estimates of inflation are published on a monthly base. At the end of every month the statistical service releases a flash estimate of the inflation rate for the last 30 days, which is confirmed or corrected around the 20th day of the next month. In the case of this April inflation rate Eurostat confirmed that inflation was a straight zero. On the shaky character of the Eurozone’s economy the ‘European Sting’ commented last week (18 May) that, “… unfortunately for us all, Eurozone doesn’t look like having abandoned the dangerous area of deflation and recession…”.

Uncertainty prevails

The prevailing economic and in some respects political uncertainty in the euro area has prompted the European Central Bank to introduce unconventional monetary policy instruments, to fight disinflation (falling inflation) and deflation (negative inflation). Obviously the ultimate target is to help the economy enter a solid growth path. The latest and more powerful of those extraordinary tools is the sovereign bond purchases program, which is financed through issuing and using of at least one trillion  of freshly printed euros in total.

This public bond buying plan started last March with a round sum of €60 billion and is expected to continue at the same or increased monthly spending pace until September 2016. However Germany had been opposing it since its inception in November 2014. Currently the Berlin government and the country’s central bank, the Bundesbank continue undermining it.

Germany doesn’t care much

It seems though that the qualified predictions about inflation are not at all encouraging and the ECB must have evidence for more retrogress. As a result, despite the strong German opposition to the government bond purchases program, the ECB has decided to reinforce rather than weakening it. This fact may also indicate the extent of the deflation risks Eurozone is exposed to. The decisiveness the ECB shows in this case is unparalleled.

Mersch says it loudly

Nevertheless such things have to be spelled out loudly in order to help enhance the effects of the actual action and ECB’s governors know that very well. To this effect, Yves Mersch, member of the inner Executive Board of the ECB, speaking in Stockholm on 18 May 2015 said: “asset purchases have a strong signalling effect. They send a powerful signal…which helps re-anchor inflation expectations and lower real interest rates. And they also signal that liquidity…further supports the easing of real interest rates and the exchange rate. The effectiveness of these signaling effects is predicated on the implementation of our program in full…that is, we will maintain the pace and volume of our intervention until we see a sustained return of inflation towards a level below, but close to, 2 % over the medium-term”. Obviously this means lower real interest rates, a prospect that Germany detests.

Mersch went even further and clarified that the ECB won’t back off from considering deflation as ‘enemy’ No1. He clarified that “The diminishing price pressures over recent years have required the ECB to act forcefully and repeatedly to fulfill its mandate. This culminated in January 2015 with our decision to expand our asset purchase program to stave off deflationary risks and stop the fall of inflation expectations…we will safeguard price stability no matter what. This is our mandate as enshrined in the Treaty. And although our instruments have changed our conviction and mission have not”.

Accusing Germany

In concluding, he went as far as accusing, albeit indirectly, Germany and the German moneybags of trying to bully ECB towards serving the very interests of Berlin, and thus neglecting the interests of every other euro area member state. He stressed that, “Some might wish that we use our armory for other purposes. But we will not be moved. We are an independent institution. Our rules are non-negotiable and we do not act for the benefit of interest groups or individual countries. Nor can financial stability considerations override our primary objective”. Such unusually strong language used by a central banker is a double-edged sword though.

A message with double meaning

It’s apparent then that the clarity, the force and even the fervor that Mersch showed in Stockholm have a double meaning. Of course his prime target was to put emphasis on the fact that the ECB is unstoppable in what it does. There is one more possible interpretation though. The strong words he used may also mean that the ECB may be in a difficult position. It may be running out of ammunition, if its present action doesn’t produce the desired results. That’s why he is so openly scolding those who undermine ECB’s policies.

Hopefully those monetary instruments the central bank is using for the first time turn out the much wished for outcome. The ECB through Mersch recognized – again for the first time – that its monetary policy has as a target to ‘ease the exchange rate’. Until now the ECB denied that it targets any specific exchange rate, presumably out of concern about possible retaliation from the other major central banks. However, it seems that in view of the shakiness of the current economic and political circumstances, the ECB is using all the ammunition it has.

The ECB cries out

Unquestionably, Mersch’s speech in Stockholm set a new platform for ECB’s policies. Understandably, the magnitude and the extent of his revelations couldn’t be without the consent of Mario Draghi. Actually certain circles accused the former of revealing ECB’s new policies to a restricted audience before being officially communicated and thus placing every other investor in a disadvantageous position.

Unfortunately, all that does not offer any comfort and reassurance to us all, workers, pensioners and the unemployed of Eurozone.

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

This man is turning cities into giant sponges to save lives

This credit card has a carbon-emission spending limit

10th ASEM in Milan and the importance of being one: EU’s big challenge on the way to China

EU prolongs economic sanctions on Russia by six months

Carnage must stop in northwest Syria demands Lowcock, as attacks intensify

This app uses augmented reality to rewrite ‘herstory’

Is euro to repeat its past highs with the dollar?

Electronic Cigarettes: Are they really as safe as we think?

Poor Greeks, Irish and Spaniards still pay for the faults of German and French banks

Ensuring the ‘lungs of the planet’ keep us alive: 5 things you need to know about forests and the UN

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

Parliament: No consent to EU budget until €11.2 billion unpaid bills are settled

5 things you probably didn’t know about global health

The 27 EU leaders did nothing to help May unlock the Brexit talks

Why youth unemployment is so difficult to counter

‘Signs of hope’ toward a political settlement in Yemen, UN special envoy tells Security Council

Indian cities are running out of water

From drought to floods in Somalia; displacement and hunger worsen, says UN

Five things everybody needs to know about the future of Journalism

Dieselgate: Parliament calls for mandatory retrofits of polluting cars

Is the advent of nationalism to destroy economic neo-liberalism?

Online marketplaces can help close Africa’s skills gap

New European frontiers for renewable energy development

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

Trust in OECD governments back at pre-crisis levels as governments seek to be more open and engaged

Under fire, UN refugee agency evacuates 135 detained in Libya to Niger

How microfinance develops decent work

MWC 2016 LIVE: Mobile World Congress shows off planes, trams and automobiles

How smart tech helps cities fight terrorism and crime

Nagasaki is ‘a global inspiration’ for peace, UN chief says marking 73rd anniversary of atomic bombing

5 ways cities can use emerging technologies to fight climate change

How blockchain can cut the cost of new medicine

MWC 2016 LIVE: 5G to trigger disruption, claim industry leaders

Ramp up nuclear power to beat climate change, says UN nuclear chief

Safer roads: More life-saving technology to be mandatory in vehicles

A call for a new crop of innovators

COVID-19: research package welcomed, EU needs to be better equipped in future

We should treat data as a natural resource. Here’s why

Bank resolutions set to remain a national affair

This Pacific island has banned fishing to allow the marine ecosystem to recover

VW emissions scandal: EU unable to protect its consumers against large multinationals

Thursday’s Daily Brief: STIs worldwide, food safety and food prices, updates on Iraq and East Africa

Here’s how the global financial crisis is still affecting your wages

5 facts to know about Africa’s powerhouse – Nigeria

A Sting Exclusive: “Delivering on the Environmental Dimension of the new Sustainable Development Agenda”, Ulf Björnholm underscores from UNEP Brussels

5 ways to get your business ready for AI in 2020

Visiting North Korea, UN relief chief spotlights funding shortfall to meet humanitarian needs

Refugee crisis: Commission proposes a new plan urging EU countries to help Italy

Mental health in times of pandemic: what can each individual do to lessen the burden?

Frans Timmermans on the European Green Deal as a growth strategy at the Bruegel Annual Meetings

Coronavirus – here’s the public health advice on how to protect yourself

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

The ethics of the Medical Technology Civilisation era

6 innovative technologies about to transform our infrastructure

“A divided Europe is not in China’s interests”, Ambassador Zhang of the Chinese Mission to EU welcomes Brussels

A ‘charismatic leader’ dedicated to making the world a better place for all: officials bid farewell to former UN chief Kofi Annan

The ECB proposes a swift solution for SMEs’ financing

Tackling Youth Unemployment

European Commission statement on the adoption of the new energy lending policy of the European Investment Bank Group

EU and Overseas Countries and Territories boost cooperation at annual Forum with €44 million

More Stings?

Advertising

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