How bad is the Eurozone economy? The ECB thinks too bad

Eurozone Summit, 07/07/2015. Mark Rutte, Dutch Prime Minister, Angela Merkel, German Federal Chancellor, Jean-Claude Juncker President of the EU Commission and Mario Draghi, President of the European Central Bank (ECB) taking his sit (in the foreground, from left to right). (EC Audiovisual Services, Date: 07/07/2015, Location: Brussels - Council/Justus Lipsius).

Eurozone Summit, 07/07/2015. Mark Rutte, Dutch Prime Minister, Angela Merkel, German Federal Chancellor, Jean-Claude Juncker President of the EU Commission and Mario Draghi, President of the European Central Bank (ECB) taking his sit (in the foreground, from left to right). (EC Audiovisual Services, Date: 07/07/2015, Location: Brussels – Council/Justus Lipsius).

Last Monday this newspaper questioned the ability of Eurozone’s economy to continue growing even at the negligible rate of three decimal points of a percentage unit, as Eurostat found it for the second quarter of this year. It also pointed out that the danger of recession is increasing and that the risk of deflation (negative inflation), a dreadful eventuality by any account, is rising. The European Sting based these gloomy prospects on some negative developments in the critical fields of retail trade, industrial production and the labor market.

Regrettably for us all, the hard working and the unemployed Europeans, only a few days later Mario Draghi the President of the European Central Bank, predicted on Thursday afternoon that, “The information available indicates a continued though somewhat weaker economic recovery and a slower increase in inflation rates compared with earlier expectations”. A weaker economic growth than 0.3% and a lower inflation rate than 0.2% (in August unchanged from July and June) may very well refer to prospects pertaining to the part of the graph below the zero line. What could be more frustrating for the average man in the streets of the major euro area cities than a prospect of a new recession and deflation?

Is a new recession brewing?

In detail now, last Thursday the Governing Council of the ECB held its monthly cession and afterwards its President Mario Draghi and Vice-President Vítor Constâncio delivered their traditional Press conference. Apparently they wanted to pass on the relevant policy changes realized on that morning and there were a lot. For one thing, the ECB now predicts lower growth and inflation from the already meager figures. As expected though the Governing Council decided to keep the basic ECB interest rates unchanged.

Starting from the non-standard monetary policy measures and, more precisely, the sovereign bond buying program of a total value of €1.14 trillion, “The Governing Council decided to increase the issue share limit from the initial limit of 25% to 33%”. This means the ECB can now buy more bonds from a certain debt issue of a specific country. This is obviously a measure aiming at increasing the ability of the ECB to support the euro area member states which need more such backing. This means that some euro area countries are in worse shape than they look.

More than €1.14 trillion is needed

Draghi didn’t stop there. He went much further and said that “In the meantime, we will fully implement our monthly asset purchases of €60 billion…They are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term”.

In reality, this means the ECB is ready to expand this program in time and value. At the same time this quote points to the fact that the ECB rather believes such an expansion will be in fact needed. This is the first time that the ECB is so clearly predicting that more monetary easing may be needed in order to support the stagnating euro area economy and aid some of its ailing member states. After this statement the euro fell fast with the dollar to much lower levels (1.1127 ).

New money to be printed

Understandably, Mario Draghi and the ECB Governing Council have not gone that far in anticipating a marked deterioration in the euro area economic climate without very good reasons. Last Thursday afternoon on many occasions Draghi referred to the negative repercussions from the worsening situation in the external environment, through lower trade and investment volumes. The fast worsening prospects of the developing countries may most probably affect Eurozone sooner and worse than estimated until recently. That’s why he spoke about “heightened uncertainties related to the external environment”. The President of ECB wouldn’t have used such strong phrase, if the situation wasn’t critical.

Of course he had to substantiate those fears with evidence. The following quote is very enlightening about that. He stated “This assessment (for lower inflation) is also broadly reflected in the September 2015 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 0.1% in 2015, 1.1% in 2016 and 1.7% in 2017. In comparison with the June 2015 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down, largely owing to lower oil prices. Taking into account the most recent developments in oil prices and recent exchange rates, there are downside risks to the September staff inflation projections”.

Preparing for deflation

Now if the ECB prediction for the 2015 at 0.1% has to be corrected downwards due to ‘most recent developments’, one can easily understand that Draghi very openly anticipates zero or negative inflation this year. If this proves to be correct, and it most certainly will, the Eurozone and probably the world economy may have a very bad year in 2015 and an even worse beginning for 2016.

At this point it has to be noted that the above mentioned overoptimistic predictions for more inflation (and why not higher growth rates) in 2016 and 2017 are quite conventional for an institution like the ECB. A less optimistic forecast could become a self fulfilling prophecy. Pessimistic predications from institutions like the ECB can just by themselves trigger a crisis.

Stating it clearly

Yet despite this danger Draghi, in answering a journalist’s question said plainly, “We may see negative numbers of inflation in the coming months”. On the same occasion he clarified that if the need appears “There aren’t special limits to the possibilities that the ECB has in gearing up monetary policy. And in a sense, the decision we’ve taken today, in changing one of the parameters (from 25% to 33%) … is exactly a sign”.

In short, what Draghi said last Thursday is actually a repetition of his famous phrase of July 2012, when amidst the Eurozone sovereign debt crisis he reassured the world that, “we will do whatever it takes to save the euro and believe me it will be enough”. If the ECB feels that things have arrived at a point that such a reassurance is again necessary, then things are not rosy at all for the hard working and the unemployed Europeans.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

WEF Davos 2016 LIVE: Cameron corroborates that Britain should remain in the EU

Are ECB’s €500 billion enough to revive Eurozone? Will the banks pass it to the real economy?

An ECB banker wants to change the European social model

Eurozone recession subsides

Stability in Europe has no chances because of Ukraine

ECB with an iron hand disciplines the smaller Eurozone member states; latest victim: Greece

COP21 Paris agreement: a non legally-binding climate pact won’t stop effectively global warming while EU’s Cañete throws hardest part to next Commission

European financial values on the rise

Draghi sees inflationary bubbles

Gloomy new statistics signify no end to Eurozone’s economic misery

Merry Christmas from Erdogan, Putin, Mogherini and the Polish firefighter

Germany loses leading export place

European Banking Union: no one is perfect

Dangerous Trumpism in the Middle East with an anti-European edge

COP21 Breaking News_08 December: Cities & Regions Launch Major Five-Year Vision to Take Action on Climate Change

Sponsored content: when QUALITY meets OPEX in manufacturing

European Youth, quo vadis?

G20 LIVE: “Our response needs to be robust…otherwise we will only find the fire we are trying to put out”, UN Secretary General Ban Ki-moon just lit up G20 in Antalya Turkey

Travel the world, find yourself

European Banking Union: Like the issue of a Eurobond?

Right2Water initiative: Is the Commission ready to listen to citizens?

Mobile World Congress 2015 first to debate EU’s new stance on Net Neutrality and Roaming Charges

Towards a seamless internal EU market for industrial goods

Arlington, USA: kick-off of the fifth round of the EU-US boxing match

The rise of alternative medical practices in modern sports

Will Europe be able to deal with the migration crisis alone if Turkey quits the pact?

Germany may prove right rejecting Commission’s bank resolution scheme

The Ukrainian crisis to destabilize Europe and the world for a long time

Why medical students decide to study abroad?

COP21 Breaking News: Paris Pact on Water and Climate Change Adaptation Announced

1 million citizens try to create a new EU institution

Nuclear weapons in Lithuania: defence against Russia or target for terrorists?

Deutsche Bank slammed by the US-based trio of IMF, Fed and Moody’s

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

Ukraine’s new political order not accepted in Crimea

MWC 2016 LIVE: Qualcomm looks to pick up Hamilton’s winning ways

The Five Chinese Girls

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

daniela-runchi-jade-president__

A Sting Exclusive: “Education in Europe, fostering skills development inside and outside the school system”

The importance of exchanges for the medical students of the world

The ECB accuses the politicians of inaction, continues injecting billions to banks

Eurozone stagnates after exporting its recession to trading partners

The new European Union of banks is ready

JADE Romania Celebrates the 4th Anniversary

Syria: Why did the US-Russia brokered ceasefire collapse? What does the duo care for?

What we need for a better European Solidarity Corps

The next 48 hours may change the European Union

ECB to play down IMF’s alarms for deflation danger in the EU

How close is Eurozone to a new recession which may trigger formidable developments?

Eurozone: New data show recession and debt closer to explosion

The financial sector cripples Eurozone growth prospects

A Sting Exclusive: “China is Making Good Stories not Bad Ones”, Ambassador Yang highlights from Brussels

Is Eurozone preparing to abandon austerity and stagnation?

Greece to stay in the euro area but the cost to its people remains elusive

EU: Tax evasion and fraud flourish under political protection

Samsung’s profits fall as cheaper smartphones gain market share

Eurozone bank rescues ‘a la carte’ until 2015 then only bail-ins

‘Internal security’ or how to compromise citizens’ rights and also make huge profits

Education and Training: where do we stand in 2014?

Eurogroup president swallows statement on savings confiscation

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