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.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

Russia and the West to partition Ukraine?

India is building a high-tech sustainable city from scratch

Italy’s rescue operation Mare Nostrum shuts down with no real replacement. EU’s Triton instead might put lives at risk

Court of Auditors: EU spending infested with errors well above the materiality threshold of 2%

Further reforms can foster more inclusive labour markets in The Netherlands

Amsterdam is developing a fleet of autonomous boats to reduce city traffic

European Youth Forum welcomes adoption of Sustainable Development Goals and calls on European countries to not ignore them!

Europe should make voice ‘more heard’ in today’s ‘dangerous world,’ says UN chief

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

Draghi cuts the Gordian knot of the Banking Union

Social inclusion: how much should young people hope from the EU? 

Bias in AI is a real problem. Here’s what we should do about it

Cutting money transfer fees could unlock $15bn for developing countries. Here’s how

The EU banking union needs a third pillar guaranteeing deposits

The Eurogroup offered a cold reception to IMF’s director for Europe

Bankers don’t go to jail because they are more equal than us all

Drone regulation is necessary to democratize the sky for humanity

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

Inflation down to 0.7%, unemployment up at 12.2%: Bad omens for Eurozone

EU Commission accuses Germany of obstructing growth and the banking union

2019 EU Budget: Commission proposes a budget focused on continuity and delivery – for growth, solidarity, security

EU Commission closer to imposing anti-dumping duties on Chinese solar panel imports?

The dangers of data: why the numbers never tell the full story

Sustainability is now mission critical for businesses. Here’s why

Professional practices of primary health care for Brazilian health and gender inequality

This woman solved one of the biggest problems facing green energy

Access to healthcare: what do we lack?

A Sting Exclusive: “Climate Change needs to be demystified”, Anneli Jättenmäki Vice President of European Parliament underscores from Brussels

Why the World Cup is a bit like international trade

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

Eurozone close to agreeing on a Banking Union

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

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

Britain, EU take edgy steps to unlock Brexit talks as the war of words rages

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

A Sting Exclusive: “Climate change-the biggest global health threat of the 21st century, yet overlooked in climate negotiations?” IFMSA wonders from COP21 in Paris

It’s Brexit again: Nigel Farage launches a personal campaign to lead the ‘No’ front

Viktor Orbán, Hungarian Prime Minister, at a 2015 event in Brussels, Berlaymont. (Copyright: European Union , 2015; Source: EC - Audiovisual Service; Photo: Lieven Creemers)

Hungary and Ireland build front to say no to EU tax harmonisation plan

Eurozone: Economic Sentiment Indicator recovering losses

The increasing drug prices in Europe

A new crop of EU ‘Boards’ override the democratic accountability and undermine the EU project

Parliament approves €500 million for schooling of refugee children in Turkey

A neo-liberal toll free Paradise for the super rich and tax hell for wage earners

Is this the way to finally beat corruption?

All sides in Yemen conflict could be guilty of war crimes, UN experts find

EU leaders slammed on anti-tax evasion inaction and expensive energy

Commerce is on the cusp of radical change. Is your organization ready?

China and China-EU Relations in the New Era

The EU Commission by serving the banks offers poor support to European mainstream political parties

Is the ECB enforcing the will of the big Eurozone member states on the small? Can the euro area live with that?

90% of plastic polluting our oceans comes from just 10 rivers

5 technologies that will forever change global trade

UN envoy says he ‘is ready to go to Idlib’ to help ensure civilian safety amid rising fears of government offensive

To Brexit, or not to Brexit…rather not: 10 Downing Street, London

G20 LIVE: “International communities and leaders have great expectations for 2016 G20 summit in Hangzhou China”, Mr Wang Xiaolong, the Chinese Foreign Ministry’s special envoy stresses live from G20 in Antalya Turkey

Eurozone’s credibility rock solid

The two big uncertainties shaping our future

The Future of Balkans: Embracing Education

One year on: EU-Canada trade agreement delivers positive results

Why Eurozone needs a bit more inflation

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