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

Advertising

Advertising

Featured Stings

EU to spend €135.5 billion in 2014 or 6.5% less than this year

Biggest London City Banks ready to move core European operations to Frankfurt or Dublin?

A new global financial crisis develops fast; who denies it?

How did Facebook fool the Commission that easily during the WhatsApp acquisition?

The EU can afford to invest trillions in support of employment

On the euro but out of it?

Turkey caught in a vicious Syrian circle bringing terror and war at home

JADE Testimonial #1: Marcello @ Enlargement

On Youth Participation: Are we active citizens?

The Parliament accuses core EU countries of exploiting their dominant political position

EU to spend €6 billion on youth employment and training futile schemes

EU regional differences betray an unjust arrangement

World Health Organisation and young doctors: is there any place for improvement?

Summer pause gives time to rethink Eurozone’s problems

Two women threaten to tear the world apart

Imaginary Journeys Into Eternal China

MEP Cristiana Muscardini @ European Business Summit 2014: International Trade in Europe

High-technology manufacturing saves the EU industry

Galileo funding: A ‘small’ difference of €700 million

Can Europe and the US reverse their nationalist and xenophobic drift? Is the West becoming belligerent?

The Brits are not an exception and that’s why they voted to leave

Minsk “ceasefire” leaves more doubts than safety, with EU already planning steps further

ECB’s first flight in Eurozone’s banking universe will be just a reconnaissance

The British “nonsense”, the relaxed Commissioner and the TTIP “chiaroscuro” at this week’s Council

MWC 2016: IoT experts fret over fragmentation

Why France, Italy and the US press Germany to accept a cheaper euro and pay for Greece

IMF: How can Eurozone avoid stagnation

High level political talks didn’t break the stalemate in Ukraine

“Airbnb and YouTube are two great examples of a crowd based capitalism”, key stakeholders outline the boundaries of the 4th Industrial Revolution in Davos

Can the EU afford to block China’s business openings to Europe by denying her the ‘market economy status’?

Trump asked Merkel to pay NATO arrears and cut down exports ignoring the EU

EU to gain the most from the agreement with Iran

Who cares about the unity of Ukraine?

Brexit: when the hubris of one man can set the UK, the EU and the entire world on fire

Hollande protects the euro from the attacks of extremists

New chapters in EU-China trade disputes

Two major EU projects falter; the Schengen Agreement now freezes and Eurozone fails to resolve the Greek enigma

“No labels for entrepreneurs!”, a young business leader from Italy cries out

Europe slammed by Turkey’s shaky Erdoğan; both playing with immigrants’ agony

Inegalitarian taxation on labour haunts Europe’s social model

2013, a Political Odyssey: What future for Italy?

The EU Parliament and the ECB unknowingly or unwillingly fail to protect our financial assets

ECB’s new money bonanza handed out to help the real economy or create new bubbles?

Dear China

ECB: The bastion of effective and equitable Europeanism keeps up quantitative easing

JADE President opens JADE Spring Meeting 2014

Cancer research put at risk by General Data Protection Regulation? The possible dangers of a data privacy EU mania

Opening Remarks by H.E. Ambassador Yang Yanyi, Head of the Chinese Mission to the EU at the Chinese Fashion Night

An entrepreneurial point-of view on tackling the migration crisis and the risks of abolishing Schengen

France and Poland to block David Cameron’s plans on immigration

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 )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s