Is there a way out of the next financial crisis? Can more printed money or austerity save us all?

European Central Bank President Mario Draghi appears today at the European Parliament on the occasion of the plenary debate on the ECB’s Annual Report for 2014. (ECB Audiovisual Services. Snapshot from the video of ECB Press Conference of 21 January 2016).

European Central Bank President Mario Draghi appears today at the European Parliament on the occasion of the plenary debate on the ECB’s Annual Report for 2014. (ECB Audiovisual Services. Snapshot from the video of ECB Press Conference of 21 January 2016).

Every time Mario Draghi, the President of the European Central Bank, tries to fight very low inflation and indirectly support growth and job creation in Eurozone with monetary measures, the Germans stand in his way. Last Thursday 28 January, Jens Weidmann, the governor of the German central bank the Bundesbank, did it again. In an interview to Frankfurter Allgemeine Zeitung he warned Draghi “not to go too far with government bond purchases”. One week earlier the President of the ECB had left it to be understood that the Eurozone central bank could do more. However, there are other, global dimensions to it. Let’s start the story from the beginning.

Printing more euro

On Thursday 21 January Mario Draghi, had said clearly that, “Yet, as we start the New Year, downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks. In this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March”.

Obviously he meant, that in view of the clear worsening of the world economic climate, the increased uncertainty in the financial and commodity markets and the growing geopolitical risks after the beginning of the year, the ECB feels obliged to inject more cash into the system, by increasing its purchases of Eurozone government bonds. The primary target is always to fight the persistently very low inflation that torments Eurozone for many years now. Of course, an indirect but more important target is to revive the stagnant real economy, by injecting freshly printed money to the system.

At least this is what the markets understood on Thursday 21 January and hiked for one day or two. Draghi, on that day, had also, for the first time given a hint about the size of the last cash injection decision. In detail and concerning the monetary policy relaxation measures decided last December at ECB’s Governing Council, he said while answering a journalist’s question: “Those measures, by the way, in December, were quite significant. If one goes back, our extension of the APP (asset purchase program) and the decision to reinvest is going to add €680 billion to the liquidity, and it’s an amount – I don’t think people have reflected enough – it’s an amount that’s about two-thirds of the original size of the program”.

Going up to €2 trillion

To be reminded that ECB’s government bond purchase program, which constitutes the largest part of the APP, started last year with monthly bond purchases of €60bn and an overall target of €1.14 trillion to be spent up to September 2016. According to Draghi, last December this program was prolonged until March 2017 and increased by €680bn. It’s highly possible then that this March, during the next Governing Council of the ECB, Draghi may press on for a majority decision bringing the total APP program to anything between €1.8 and 2 trillion.

This amount is so big that it has rung bells in Germany, the usual suspect to oppose ECB’s extraordinary quantitative easing monetary policy. The German central bank, the Bundesbank under its President Jens Weidmann, and the German Federal Ministry under Wolfgang Schäuble have criticized, attacked and voted negatively to all Draghi’s plans aimed at fighting deflation and stagnation with more cash injections.

Nevertheless, this is exactly what all the major central banks from Beijing and Tokyo to London and Washington have been doing during the past six years. Yet the Germans still believe that only hard labor can produce more growth. As for deflation they have repeatedly argued that there is nothing wrong about the inflation rate being stuck in the zero area.

Do it like the Fed

In any case, ECB’s €2tn are close to the region the American central bank, the Fed, has reached with its super quantitative easing of $4.5tn. In reality, the ECB takes up the relay from the Fed in feeding the insatiable appetite of the major banking sharks more cash free of charge. This is tantamount to the western monetary system bowing to their threats.

Unfortunately, it seems that the next financial crisis won’t be effectively repelled with one more euro trillion. The real problem is that those banks have ‘invested’ or lent a large part of the money they have got for free to the now faltering borrowers in the developing world. Brazil, Turkey, South Africa, Malaysia and others will find it very difficult to honor their debts with an appreciating dollar, their devaluing national currencies and their growth rates diminishing. Even the Chinese yuan/renminbi money is now devaluing fast, having already triggered a dangerous and sizeable outflow of capital from the country.

If the developing economies, China included continue faltering, a prospect which is considered rather certain, the world economy cannot expect to be rescued by the deflationary and stagnant Eurozone or even the ‘mildly growing’ US economy. In the US, one after the other the Presidents of the regional American central banks are acknowledging that employment, inflation and GDP growth do not emit positive messages. In the latest occurrence John Williams, the San Francisco Federal Reserve Bank President said on 29 January that, in contrast with last December, he now sees less growth, higher unemployment and lower inflation.

Money for nothing

This diagnosis means that the American economy is not at its best. One side effect of that can be that the bankers will continue to usurp that $4.5tn at almost zero interest rates. The Fed would hesitate to increase its rates amidst a stagnating US. Still, this may not be enough to save us all from a new banking melt-down, despite the additional euro trillion to be handed to bankers by the ECB. Of course, this doesn’t mean, either, that Germany is right and austerity and financial orthodoxy can save the world from a new Armageddon. Berlin’s recipe will just add the dissolution of the Eurozone to a simmering financial crisis. Alas to us all, the second fallacy will prove worse than the first.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Yemen: Tackling the world’s largest humanitarian crisis

4 things to know about the state of conflict today

5 amazing schools that will make you wish you were young again

Yemen: 11 more ‘terrible, senseless’ civilian deaths reported, following attack in Sana’a – top UN official

Hiring more female leaders is good for profits. Here’s the evidence

Upgraded EU visa information database to increase security at external borders

Towards a zero tobacco public space in Cameroon

On International Youth Day the European Youth Forum calls for true youth participation

Theresa May expresses her optimism about Britain’s economic success while UK business outlook seems ominous

EU Leaders’ meeting in Sofia: Completing a trusted Digital Single Market for the benefit of all

We need a new Operating System for the Fourth Industrial Revolution

European Accessibility Act: Parliament and Council negotiators strike a deal

Interview with ourselves: the mental health of health professionals

Could entrepreneurship be the real cure against the side effects of Brexit?

CLIMATE CHANGE FOCUS: Lake Chad trees keep deadly drought at bay

Another doomed EU attempt to interfere in Libya?

It’s time to strengthen global digital cooperation

A Sting Exclusive: China’s Foreign Minister Wang Yi on South China Sea issue at the ASEAN Regional Forum

In Rwanda, high-speed drones are delivering blood to remote communities

Parliament sets up plan to fight the 3,600 criminal rings of EU

To all far-right partisans who exploit Charlie Hebdo atrocity: a peaceful reply given by a peaceful student

Preparing the future today: World Health Organisation and young doctors

Ensure that widows are ‘not left out or left behind’, UN chief urges on International Day

Member states jeopardising the rule of law will risk losing EU funds

Artificial intelligence: Commission takes forward its work on ethics guidelines

7 ways to break the fast fashion habit – and save the planet

EU budget: Commission proposes major funding increase for stronger borders and migration

Trump stumbles badly on his Russian openings; Europeans wary of Putin

EU mobilises €21 million to support Palestine refugees via the UN Relief and Works Agency

Your morning cup of coffee contains 140 litres of water

European Semester Autumn Package: Bolstering inclusive and sustainable growth

This surgeon runs a makeshift hospital for over 200,000 people

Marco Polo’s Dream

5 surprising ways to reuse coffee grounds

Youth Entrepreneurship Issue of the month: JEN, organisers of JADE October Meeting, on why JEs should come together

Global Citizen – Volunteer Internships

From Shadows to Sunlight, Paraguay’s Road to Transparency

UN postal agency ‘regrets’ US withdrawal

6 young leaders who are improving the state of the world on International Youth Day

Main results of EU-Japan summit which took place on 25/04/2019 in Brussels

These are the world’s most positive countries

European Business Summit 2014 Launch Event: “Energising Industrial Growth”

“Smoking steam instead of tobacco, are the E-cigarettes a safer alternative?”

Syria: ‘Deplorable’ violence in Idlib against civilians, humanitarian workers must ‘stop immediately’: UN Coordinator

Climate activist Greta Thunberg urges MEPs to put words into action

How music can help children with autism connect

‘Great cause of concern’ UN chief tells Security Council, surveying ‘bleak’ state of civilian protection

EU-UK: A deal synonymous to ‘remain’, England pays the Irish price

More refugees being helped by family, work and study permits, finds OECD and UNHCR study

UN chief welcomes re-opening of key Gaza border crossing

Human health – litmus paper for the climate change?

5 charts that explain big challenges facing Italy’s new government

UN chief welcomes new push by El Salvador’s political parties to begin fresh dialogue

Working Muslim women are a trillion-dollar market

New EU rules ensure better protection for 120 million holidaymakers this summer

US must abide by humanitarian refugee accords: UN refugee agency

Who is responsible for public health? The tendencies and its benefits –or not– on Health Education around the world

Statelessness for terrorists’ families, never an acceptable option, urges UN rights chief

UN police officer recognized for protecting vulnerable Somali women from abuse

European Youth Forum welcomes the European Commission’s proposed revision of the Union Code on Visas, however it does not go far enough

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 )

Google photo

You are commenting using your Google 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 )

Connecting to %s