Why the ECB had to clarify it caters for the entire Eurozone not just Germany?

European Parliament. Committee on Economic and Monetary Affairs (ECON). Monetary Dialogue with the President of the European Central Bank Mario Draghi (on the left). Roberto Gualtiery (S&D, IT), Committee Chair accompanies Draghi to the meeting room. Copyright: � European Union 2016 - Source : EP. City: Brussels. Event Date: 15/02/2016.

European Parliament. Committee on Economic and Monetary Affairs (ECON). Monetary Dialogue with the President of the European Central Bank Mario Draghi (on the left). Roberto Gualtiery (S&D, IT), Committee Chair accompanies Draghi to the meeting room. Copyright:  European Union 2016 – Source : EP. City: Brussels. Event Date: 15/02/2016.

Last Thursday morning this newspaper concluded that the “only EU institution with true European motives and vision remains the European Central Bank of Mario Draghi”. Just some hours later in that Thursday afternoon the European Sting was confirmed one hundred percent by Mario Draghi, the President of ECB, who said that “We have a mandate to pursue price stability for the whole of the Eurozone, not only for Germany. This mandate is established by the Treaty, by European law. We obey the law, not the politicians, because we are independent, as stated by the law”. Draghi was speaking at the press conference after the regular meeting of ECB’s Governing Council.

This is a major step forward for ECB, not because Draghi said so but because this statement was unanimously backed by the central bank’s Governing Council. Even the great adversary of Draghi, Jens Weidmann, Governor of the German central bank, the Bundesbank, and member of ECB’s Governing Council had supported the Italian about the central bank’s independent role. Two weeks ago Weidmann had criticized his compatriots who had been accusing Draghi of favoring the highly indebted member states of the Eurozone with his zero interest rates policies. Let’s take one thing at a time.

ECB’s independent role

It was a revelation to watch Weidmann – in an interview to Financial Times online service on 12 April – defending Draghi’s expansionary monetary policy, under which the ECB, among other things, has zeroed interest rates. The Governor of Bundesbank has been opposing for years Draghi’s expanding monetary policy into the capital market, with purchases of large quantities of government bonds. Last month, the ECB said it will extend as from June this practice to corporate bonds too, increasing its monthly purchases of bonds to €80 billion.

Weidmann however, aligned himself with Draghi, when a number of conservative German politicians raised the tone of criticism against ECB, about its very low interest rates policy. It was Wolfgang Schäuble, the German minister for Finance who has started criticizing the ECB, when the central bank’s Governing Council decided last year to pursue a truly quantitative easing policy and reduce its basic interest rates.

Rejecting political interference

Schäuble however, recently decided to cross the Rubicon, when in mid March the ECB Governing Council lowered the basic interest rate by 5 basis points to a straight 0.00%. The German minister for Finance actually accused Mario Draghi and the ECB, as being responsible for half the electoral influence of the eurosceptic, right wing German political party Alternative für Deutschland, AfD.

He explained that now the bank deposits of the German savers yield nothing, and the pension funds and the insurance companies have a difficult time in honoring their obligations. Presumably, this development had political side effects, strengthening the eurosceptic political forces. A number of conservative German politicians in their turn pointed a finger at Draghi and the ECB for undercutting the well being of Germans.

A central bank just for the Germans?

The fact is that over the past fifteen years Germany has hoarded more that €1.5 trillion in financial reserves from trade surpluses. This makes Germany the major lender for her euro area partners. As a result, this country has a very good reason to press for higher interest rates. At the same time, most of the other euro area countries are net borrowers and some of them are actually over indebted. In short, the vast majority of the Eurozone countries would prefer lower interest rates, so as the servicing of their debt to leave some room for growth spending. As a result, there is a conflict of interests between Germany and the rest of the Eurozone.

Balanced policies

All along the past six years though, after the 2008-2010 financial crisis, the ECB tried to balance those opposing interests. It didn’t zero its rates right after the crisis broke out, as all the other major central banks of the world did. It took a rather too long time for the ECB to start cautiously reducing its basic rate. Many financial analysts have criticized the ECB about its anti-crisis measures (cheap and abundant money), and most of them agreed that it ‘was too little too late’.

The ECB kept its basic interests rate above the zero line till 10 March 2016, obviously also minding the needs of the German saver. On that date however, the central bank, hard-pressed by the realities of a too low inflation rate and an always stagnating Eurozone economy, was obliged to zero its basic rate. Yet again it didn’t do it to protect the over indebted countries, but because it had to, since inflation had reached the dangerous deflation region.

Fighting deflation

The obvious target is to fight the very low inflation, which threatens to draw the European economy into a vicious cycle of falling prices and ultimately lead to a new crisis. By the same token, the low cost money is supposed to help all and every Eurozone government and the private sector, to start investing again, and possibly bring the economy to a virtuous path of perceptible and sustainable growth.

Some Germans though don’t see it this way. A large part of the population and consequently many conservative politicians and more so the right wing, Eurosceptic AfD party, altogether accuse the European Union about not catering just for their country. Obviously, they want the Union to primarily serve Berlin’s interests.

Merkel v Schäuble

Fortunately, not the entire German political elite think in this way. A shining example is the German Chancellor Angela Merkel, who is rather driven by broader European motives, than by narrow nationalistic interests. On many occasions, Merkel has supported relaxed monetary policies and the cheap money lines of ECB, against the attacks of her No2 in government, the orthodox Finance minister Wolfgang Schäuble.

It seems then that this time also, Merkel is of the same opinion. Last Friday 22 April a Chancellery spokesman denied that Merkel conferred with Weidmann about ‘some’ German politicians, who are overdoing it in criticizing ECB’s zero interest rate decision. The financial daily ‘Handelsblatt’ had published this information without citing a source. This is not unusual for this German daily. In any case, Weidmann didn’t need encouragement by the Chancellor to defend ECB’s independence.

Defending the independence

As mentioned above ten days earlier, Weidmann had defended ECB and Mario Draghi in that FT interview. He had commented, “It’s not surprising for politicians to have opinions on monetary policy, but we are independent,” and then he added, “The ECB has to deliver on its price stability mandate and thus an expansionary monetary policy stance is appropriate at this juncture regardless of different views about specific measures.”

In any case, last Thursday afternoon, Draghi closed the issue by observing that Germany is not the only Eurozone member state. There is more to it though. Earlier last week the ECB had decided to purchase European Financial Stability Facility (EFSF) bonds held by the Greek commercial banks, in order to support their liquidity with low cost financing. And that is to be realized, without Athens having concluded an agreement with its creditors, a condition that Draghi himself had set as a prerequisite for the inclusion of the Greek banks in the quantitative easing program.

Supporting Greece

Yet, the ECB last week included the four systemic Greek banks in its asset purchases program, presumably because the ECB is confident that Greece will conclude sooner or later an agreement with her creditors. It is also an indication that the ECB wants to underline Europe’s soft stance vis-à-vis Greece, in clear distinction from IMF’s and Germany’s tough positions. The Greek banks hold a round sum of €37.5 billion in EFSF bonds, a fact that means they can count on additional liquidity of around €18 billion over the next months. This will be a great help to the crisis stricken country, coming directly from the ECB.

All in all, the ECB has emerged as a truly European institution, with its carefully balanced policies. As Draghi has repeatedly stressed, the goal is that ECB’s quantitative easing measures should be passing through and be felt in all member states.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

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

CEOs in these countries are more likely to go with their gut

EU’s Mogherini visits Turkey “to step up engagement” and highlight interests

Parliament backs a modernised EU electoral law

EU-US resume trade negotiations under the spell of NSA surveillance

Syria: Civilians caught in crossfire, UN refugee chief urges Jordan to open its border

“China will strive to enhance the performance of economic growth”, President Xi highlights from the World Economic Forum 2017 in Davos

MARKUP initiative to boost market access to Europe for East African SMEs

TTIP 9th Round marked by American disappointment: Will some optimism save this trade agreement?

Cultural diversity can drive economies. Here are lessons from India and South Asia

A Sting Exclusive: “Climate change and youth inaction: oblivion or nonchalance?”, AIESEC wonders from Brussels

The EU Commission implicates major banks in cartel cases, threatens with devastating fines

Biggest London City Banks ready to move core European operations to Frankfurt or Dublin?

Eurozone at risk of home-made deflation and recession

‘Path to peace’ on Korean Peninsula only possible through diplomacy and full denuclearization: US tells Security Council

Our present and future tax payments usurped by banks

Facebook-Cambridge Analytica: MEPs demand action to protect citizens’ privacy

Banks must take bold action to fight climate change. This is how they can do it

EU and India re-open talks over strategic partnership while prepare for a Free Trade Agreement

Somalia: UN urges steps to ensure future elections not ‘marred’ by rights abuses seen in recent polls

3 natural mysteries that could be explained by quantum physics

UN rights chief denounces Burundi for ‘belligerent and defamatory’ attack on inquiry team

Job automation risks vary widely across different regions within countries

Youth and children in Europe set the new perspectives for the decades to come

WEF Davos 2016 LIVE: “If we do not do properly the Paris agreement, then all 16 remaining goals will be undermined”, UN Secretary General Ban Ki-moon cautions from Davos

Nuclear non-proliferation treaty an ‘essential pillar’ of international peace, says UN chief

The G7 should take the lead on ocean targets for 2020

Court of Auditors: EU spending infested with errors well above the materiality threshold of 2%

“Only through energy policy we can trigger competitiveness”. The Sting live from #EBS2015: Energy Union – When will it happen?

The success story of a Chinese investment in the Greek port of Piraeus

Faith can overcome religious nationalism. Here’s how

A day in the life of a refugee: the role of nations and citizens of the world

Young people are not a nameless, faceless mass. So why do we treat them as such?

SPB TV @ MWC14: The TV of the Future

“None of our member states has the dimension to compete with China and the US, not even Germany!”, Head of EUREKA Pedro Nunes on another Sting Exclusive

The creative technology and its advancements

Finland must focus on integrating migrant women and their children to boost their contribution to the economy and society

G20 LIVE: “ISIL is the face of evil; our goal is to degrade and ultimately destroy this barbaric terrorist organisation”, US President Barack Obama cries out from Antalya Turkey

EU citizens disenchanted with Economic and Monetary Union over rising poverty and high unemployment

Hazy ‘breakthrough’ saves PM May, leaves Ireland in limbo: Brexit

India-UN fund gets 22 development projects off the ground in first year

More than one billion people do not have access to electricity. What will it take to get them connected?

The European Internet is not neutral and neither is the Commissioner

The impossible end of the war in Syria

New rules for audiovisual media services approved by Parliament

Facebook has built an AI-based tool that fixes the social network when it crashes

Merkel had it her way with the refugees & immigrants but can Greece and Turkey deliver?

MWC 2016 LIVE: T-Mobile US reveals 5G trial plans

Air quality: Commission takes action to protect citizens from air pollution

Digital distrust: We’re losing faith in technology to solve the world’s problems

What lies ahead for the Korean Peninsula?

Chauvinism and xenophobia will lead to global assertiveness and more wars

VW emissions scandal: While U.S. car owners are vindicated, Europe still unable to change its laws and protect its consumers

Can Greece’s devastating economy deal with the migration crisis?

UN Human Rights Council resolution on youth and human rights: a step forward for youth rights

A very good morning in European markets

The EU Commission lets money market funds continue the unholy game of banks

How wealthy people transmit this advantage to their children and grand children

UN chief welcomes agreement by rival leaders in South Sudan, as a step towards ‘inclusive and implementable’ peace

Ahead of State of the Union the European Youth Forum highlights lack of action on youth employment

What are the real targets of EU’s efforts to fight tax evasion?

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