Draghi rehabs ECB into a tool to support growth and employment; a departure from Teutonic orthodoxy

Donald Tusk, President of the European Council (second from left) meets Mario Draghi, President of the European Central Bank (first from right) in the sideline of the Euro Summit. (European Council – Council of the European Union, Audiovisual Services. Shoot location: Brussels – Belgium. Shoot date: 07/07/2015 Copyright credit ‘The European Union’).

On Thursday 22 October Mario Draghi, the President of the European Central Bank delighted the world capital markets with his comment about the “factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term” He added that “In this context, the degree of monetary policy accommodation will need to be re-examined…in December”. Everybody translated this statement into more free money in the market.

The ECB has set the inflation target at below but close to 2%. According to ECB sources, the inflation objective should be at 1.8%-1.9%. If the price rises oscillate away from this benchmark, as they currently do, the central bank has to act, and act it will because its statutes say so. To this end, Draghi appears ready to flood the markets with more newly printed and cheaper euro. This prospect pressed the parity of the euro with the dollar to much lower levels and helped all major stock markets to earn several points. The European Sting devoted a full analysis on the causes and the effects of this new monetary policy lines on 26 October.

The ECB to fight disinflation…

However, the depression of the inflation rate to levels below or near the zero line is not in reality with the main cause that prompts the ECB to act. Draghi is primarily worried about the stagnation of the Eurozone and the world economy, but ECB’s mandate doesn’t allow it to set monetary policy targets aiming at more growth or less unemployment. A number of German professors are ready to sue Draghi for transgressing his mandate if the ECB does that. That’s why he is always very careful to note that it’s the very low inflation and not a stagnating real economy and high unemployment that oblige him to hand out more zero cost money to the real economy, contrary to the German financial orthodoxy. The Teutonic ideology wants the ECB not to support growth and employment by printing and distributing euro.

…and support growth and employment

Last Saturday 31 October speaking at an interview to his native country though, at major financial newspaper ‘Il Sole 24 Ore’, he exclaimed as it follows: “Global growth forecasts have been revised downwards. This slowdown is probably not temporary. To illustrate the importance of emerging markets, it is recalled that they are worth 60% of gross world product and that, since 2000, they have accounted for three-quarters of world growth. Half of euro area exports go to these markets. The risks are therefore certainly on the downside for both inflation and growth, also because of the potential slowdown in the United States… There are still at least 20 million unemployed people in the euro area – many of whom are young – who need to be brought back into the labor market”.

In short, Draghi also worries about unemployment and economic stagnation as well as for the very low inflation rates. The German idea is that policies to improve the conditions in the labor market and the real economy pertain to the domain of politicians and do not fall within the mandate of the central bank. It must be noted that the German minister of Finance Wolfgang Schäuble has commented that there is nothing wrong with the very low inflation rates.

Everybody else does it

On the contrary, all the other major central banks of the world including the Bank of England, the American Fed and the Bank of Japan are clearing setting as their targets to fight unemployment and support the real growth with purely monetary measures that is by printing and distributing zero cost money. Germany strongly disagreed with this approach.

Nevertheless, the undercapitalization and the other problems that currently plague the German banks and more so the Deutsche Bank have obliged the German decision makers to reconsider their orthodox views about monetary policy. It’s like Volkswagen! The Germans played the card of mechanical excellence and financial orthodoxy for as long as it helped them and hurt anybody else. This practice also included obscure ways and means to make their cars and banks look perfect while they are rather problematic.

Germany reconsiders

When the moment of truth came though, Berlin begs for clemency and say they won’t do it again. In both cases, Volkswagen and Deutsche Bank alike, the Germans were quite deceitfully making their cars and bank look more than they really were. Now in both cases the new management in Volkswagen and Deutsche Bank are about to cut off the sick parts. The bank is about to cut 35,000 jobs mainly in its rotten ‘investment’ part and posts losses of €6 billion in the third quarter of this year. As for Volkswagen, God knows where the downfall is to stop. In the Deutsche Bank case no dividends will be paid for 2015.

That’s why the German minister of Finance and his echo, the Governor of the Bundesbank, ‎Jens Weidmann, have now swallowed their tongues, when Draghi talks about more zero cost money to be printed and distributed in Eurozone. This is so, simply because the largest recipient of this new monetary bonanza will most probably be the Deutsche Bank.

Moralizing is a boomerang

Moralizing is a double-edged blade and usually those who preach it are crooks, and invariably they pay a dear price for their insulting imprudency. Unfortunately, they share their large costs with the innocent ones. Injecting trillions into a greedy banking system just postpones the next crisis and makes it even more destructive, but the Germans think about that only if other people’s banks are in trouble.