During the days ahead of last Thursday’s 3 December meeting of the European Central Bank’s Governing Council, financial markets and market oriented media had been pressing for a stronger monetary accommodation (easing), than what President Mario Draghi finally announced in the afternoon of that day. As a result, the euro appreciated markedly with the dollar and market commentators said they were unimpressed if not let down by what the ECB decided.
For an independent observer though, that is, someone outside the global financial-media complex, this attitude is a natural thing to expect from capital markets. The financial-media complex systematically presses for more and cheaper money from central banks. And now that the American central bank, the Fed is about to stop charging the banks with zero interest rates, the banking industry and more so the grey financial system wants the ECB to take the lead and zero its main interest rate. Instead, the ECB kept the cost of money to banks unchanged (main refinancing operations) at the completely negligible level of 0.05%. Still, the big lenders were ‘let down’, because they were obliged to continue paying even this meager cost for the money cornucopia they unreservedly receive.
What did Draghi say?
However, Draghi did announce an interest rate reduction. He stated that “we decided to lower the interest rate on the deposit facility by 10 basis points to -0.30%”. This is the negative interest rate the banks are charged for parking their money with the central bank. Understandably, the ECB took this measure to increase the incentive for the banks to pass to the real economy (accord loans to consumers and businesses) the money they get for almost free. Unfortunately, the volume of the bank loans to the real economy keeps falling for many years now.
The ECB took some more measures to ease the monetary conditions in the euro area and through it in the global financial markets. Draghi said, “as regards non-standard monetary policy measures, we decided to extend the asset purchase program (APP). The monthly purchases of €60 billion under the APP are now intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term”.
Ready to print €360 billion more
To be noted that until last Thursday the time horizon of this APP program was set at the end of September 2016. The reader should know that the APP is the latest ECB’s monetary tool to fight euro area’s economic stagnation and reduce unemployment. Now the Governing Council decided to prolong it by six months, meaning that the central bank is willing to print and spend another €360 billion, above the ceiling of €1.14 trillion.
Last January, when the ECB introduced this APP tool, the program had a nineteen month horizon (March 2015 to September 2016), an overall amount of €1.14tn and monthly purchases of assets of around €60bn. Nevertheless, both the January and this December decisions of the Council foresee that the program will last “until the Governing Council sees a sustained adjustment in the path of inflation”. The latest decision though, indirectly raises the total amount of the APP by €360bn and this had to be reckoned by Draghi. It appears that the financial markets remained ‘unimpressed’ with this extra €360bn.
Money to local governments
Draghi announced another extension of the APP program. He stressed that “we decided to include, in the public sector purchase program, euro-denominated marketable debt instruments issued by regional and local governments located in the euro area”. Obviously this is an ECB decision to support the euro area economy in its regional and local facets. Unfortunately, this expansion of the APP also left the major financial players quite indifferent.
Understandably, the regional and local government debt paper is of interest only to small local and regional banks, not a market for the majors. This is one more indication that the big banks have definitively abandoned the retail markets, denying their services to consumers and to small and medium borrowers. It’s obvious that the heavyweight money bags are now exclusively focused on the global derivative markets, the risk undertakings of all kinds and the gray financial services.
More expensive exports
As noted at the beginning of this article, last Thursday’s afternoon decisions by the ECB Governing Council disappointed the major capital markets. Prices in the New York Stock Exchange fell sharply and the euro gained a lot of grounds with the dollar. Until that moment, the markets had the dollar long (upwards) and the euro short (downwards), but the ECB’s decision reversed that and the financiers didn’t like it at all. As if the money markets wanted to punish the ECB for not going along with them, within hours the euro gained almost five American cents returning closer to the region of 1.10 after having reached for days the 1.05 lows.
This is an unwanted side effect of ECB’s prudent policy, which makes the exports of Eurozone more expensive. The money markets would have preferred the ECB to zero its basic interest rate (main refinancing operations) and increase the monthly asset purchases, much above their current levels of €60bn a month.
More trouble from Germany
This was not the only concern of Draghi’s. He had to work hard to pass this extraordinary albeit conservative monetary easing gaining a relative majority at the Governing Council. There are rumors that at least five of its 25 members voted against the Presidency’s proposal. Of course, the opposition was concentrated around Jens Weidmann, the always disagreeing Governor of the German central bank, the Bundesbank who wants the ECB indifferent to real economy’s woes. Weidmann meticulously follows the line of thinking of his political boss, Wolfgang Schäuble the German minister for Finance.
The Teutonic school of financial orthodoxy wants the monetary policy to be completely neutral. That is to be cut off from economic reality and avoid using monetary measures in support of growth and employment (the Fed, the Bank of England and the Bank of Japan are doing it in excess). The Germans maintain that only hard labor can produce real values, growth and employment not the monetary policy.
Unquestionably this is true to a certain degree, but the last financial crisis proved that only monetary policy can save our modern brave world from an economic Armageddon. Unfortunately, we are still in the aftermath of the latest crisis or probably in the prelude of the next one. As things stand now, it seems that the world financial system needs a constant cornucopia of free central bank newly printed money to keep it going. Otherwise the banking system and the real economy may collapse.
Schäuble and Weidmann
Schäuble and Weidmann know all that very well. The unstable position of the banking system of their own country doesn’t let them forget it. It’s common knowledge that the Deutsche Bank and some regional German banks are seriously and dangerously undercapitalized. Yet they both keep opposing the monetary easing measures of ECB, because they think that in this way they can corner the rest of euro area countries, because many member states are in a much worse position than Germany.
Weidmann, soon after the ECB Governing Council of last Thursday ended, rushed to hold an interview with the notorious German newspaper Bild. He asserted that ECB’s APP monetary easing program failed to achieve its targets and added that the latest additional easing was not necessary. Of course he knew that the failure of APP’s free piles of money to restart the euro area economy couldn’t be blamed on ECB. The banks chose to use the new free money for their own purposes and didn’t pass it to the real economy.
In this way Weidmann and his political boss Schäuble were reassured that the shaky Deutsche Bank would continue being freely refinanced by the ECB and at the same time the latter person would emerge as the guardian of monetary orthodoxy for the conservative German voters to see. All that at the expense of Mario Draghi.
Germany owes a lot to Gerhard Schroeder…
The duo also knows that Germany can cope better than the rest of the Eurozone member states, with the difficulties of the current economic conjuncture. A lot of analysts attribute this quality of the German economy though to the deep restructuring under the Gerhard Schroeder plan, which was introduced after the 2005 general election by the grand coalition government of Christian Democrats (CDU) and Socialists (SPD) under Angela Merkel. Until then Germany was the big patient of the European economy.
…But Berlin forgets that
Whatever the present merits of the German economy, the truth remains that Berlin insists in overexploiting them in order to corner the rest of its Eurozone partners. The duo of Schäuble and Weidmann press so hard in this direction, to the point that even Chancellor Angela Merkel has to intervene at times to restrain them. This is evident in the entire process of putting together ECB’s monetary policies as well as in the efforts of Brussels to keep Greece in the euro area.
The conclusions that can be drawn from all that are many. For one thing, the euro area economy will continue staggering in the foreseeable future. The new ECB measures may be judged as ‘too little too late’ thanks to the German stubborn opposition. The euro/dollar rate may not fall to parity within this year but it will in the coming months, depending on the Fed’s policy with the dollar interest rates. Last but not least the spectre of a new financial crisis becomes more visible as long as the euro area doesn’t respond to the ‘money treatment’.