Undoubtedly, Mario Draghi’s speeches and comments are being carefully monitored, analyzed and discounted by government decision makers, capital market experts and of course the Press. Invariably, this was the case last week, when the President of the European Central Bank appeared before the European Parliament’s Economic and Monetary Affairs Committee. ECB’s accountability to the European Parliament is a central counterpart to the central bank’s independence.
Along these lines, Draghi’s comments last week at the EU Parliament affected not only the capital and money markets, but also changed the widely held views about ECB’s role in the Eurozone. Actually, last week he went one step further from what he had said in Malta on 22 October. On that occasion, after the regular Governing Council session, he revealed that “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”. Everybody translated that into a possible additional relaxation of ECB’s monetary easing policy.
“We would use all instruments”
Last week in the Parliament though he added that “If we (n.b. the ECB Governing Council) were to conclude that our medium-term price stability objective is at risk, we would use all the instruments available within our mandate to ensure that an appropriate degree of monetary accommodation is maintained”. He then added that “other instruments could also be activated to strengthen the impact of the program if necessary”.
The step further is that “other instruments could also be activated”. Obviously, he meant that the €1.14 trillion asset purchases program may be seconded by additional instruments. The outcome will be that more freshly printed hundreds of euro billions may be injected in the Eurozone. And what is equally important, those additional hundreds of billions may be at even lower interest rates, lower that the current 0.05% rate for ‘main refinancing operations’.
Not to forget, that, out of the three key ECB interest rates, the rate for ‘deposit facilities’ is already negative at -0.20%. Incidentally the third key ECB interest rate is the ‘marginal lending facility’ rate at 0.30%. The bulk ECB lending to banks is conducted under the main refinancing operations heading.
Money for nothing
A few words now about the basics of our banking system. Obviously the Eurozone banks, at least all the 130 systemic ones, have access to ECB financing at 0.05% interest rate cost. The lenders then – when they don’t use this almost free money bonanza to bet in every possible and impossible derivative and other grey market – provide loans to the real economy at an average rate of 8% to 10%. In this way they make a huge profit on the money they got for free from the society in its entirety. Money for nothing truly exists but only for bankers.
It seems now that the banks want to evade even this quite negligible interest rate cost of 0.05% on the money they get from the ECB. The Eurozone banks urgently need large amounts of capital in order to be able to stand on their feet and start playing their role as creditors of the real economy. The ECB from its part cannot overlook the reality of a stagnant and deflationary real economy. That’s why Mario Draghi insists that the ECB should provide the lenders with additional free of charge liquidity in order to help the banks start playing their traditional role and thus support the ailing euro area economy to regain a sustainable growth path.
The necessary evil; banks
That’s why Draghi told the European legislators last week that “other instruments could also be activated”. The MEPs understood quite well what he meant by that and they applauded this new ECB effort to revive the euro area economy. As for the dangers from the very low interest rates, Draghi had a very good answer. When told by a MEP that the zero interest rate policy has hurt the insurance companies and various investment schemes, he said that the ECB is not there to guarantee the profitability of those businesses.
All in all, it’s rather certain that in view of ECB’s new action, the euro may soon head closer to parity with the dollar, which is a very positive prospect for Eurozone exporters. But it’s not at all sure that the banks will pass on the extra free liquidity they may receive to the real economy.