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

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

European Commission: the LED lights of your Audi A6 shall save our planet

How ‘small’ is Europe in Big Data?

Cyprus Parliament says no to blackmail

Tusk fights back while charismatic Boris goes against everybody in Brussels pushing the UK to leave the EU now or never

MWC 2016 LIVE: EC adds Brazil to partner tally

IMF – World Bank meetings: US – Germany clash instituted, anti-globalization prospects visualized

The next 48 hours may change the European Union

VW emissions scandal: EU unable to protect its consumers against large multinationals

Can the national and age groups pockets of unemployment cause irreparable damages to Eurozone?

Gender Equality as a platform to improve Medicine

Russia won’t let Ukraine drift westwards in one piece

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

The Commission offers exit from the EU budget stalemate

Trade protectionism and cartels threaten democracy

Trump ostracized by his party and world elites but still remains in course; how can he do it?

Europe provides financial support to African countries while Turkey denies to change terrorism laws jeopardising the EU deal

Investment, not debt, can kick-start an entrepreneurial Europe

Tsipras bewildered with Berlin’s humiliating demands; ECB expects political sign to refinance the Greek banks

IMF to teach Germany a Greek lesson

EU decides “in absentia” of civil society

A Sting Exclusive: “Infrastructure can lay the groundwork for the Sustainable Development Goals” by Mr Fulai Sheng, UN Environment Senior Economist

World Retail Congress announces Dubai 2016 Hall of Fame Inductees

Fake news and Freedom of Press: can the EU ever find the fine line?

ECB to play down IMF’s alarms for deflation danger in the EU

G20 to Germany: Abandon miser policies

Eurozone stuck in a high risk deflation area; Draghi expects further price plunge

Real EU unemployment rate at 10.2%+4.1%+4.7%: Eurostat Update

Climate negotiations on the road to a strong Paris agreement rulebook

EU continues targeting on Chinese steel imports instead of the revival of its own economy

The great challenge of the 21st century is learning to consume less. This is how we can do it

EU regional differences betray an unjust arrangement

It’s Brexit again: Nigel Farage launches a personal campaign to lead the ‘No’ front

Draghi drafts a plan to donate more money to bankers, the era of ‘money for nothin’ is flourishing

Future Forces Forum: Prague will be hosting the most important project in the field of Defence and Security

Whose interests are protected by the new Mortgage Directive?

EU Trade Ministers come together in a desperate attempt to save TTIP

JADE Spring Meeting 2017– day 1: Excellence awards, panel discussion, keynote speeches

The EU can afford to invest trillions in support of employment

EU takes again positive action on migration crisis while Turkey asks for dear favors in exchange for cooperation

A new world that demands new doctors in the fourth industrial revolution

Bankers don’t go to jail because they are more equal than us all

Neelie Kroes at the European Young Innovators Forum: Unconvention 2014

Energy Union: EU’s effort towards a cleaner climate with integrated energy market

Markets are more sensitive to Greece’s woes than Merkel

Trump badly cornered at home by agribusiness and steel consumer lobbies: Trade

G20 LIVE: “This was not an attack against France, this was an attack against the universal human values!”, EU President Juncker cries out from G20 in Antalya Turkey

G20 LIVE: “Our response needs to be robust…otherwise we will only find the fire we are trying to put out”, UN Secretary General Ban Ki-moon just lit up G20 in Antalya Turkey

The inhumane face of crisis mirrored in numbers

European Court of Justice to Google: It is #righttobeforgotten but not #righttoberemembered

Yellen and Draghi tell Trump and markets not to expedite the next crisis

Berlin cannot dictate anymore the terms for the enactment of the European Banking Union

Eurozone: Statistics don’t tell the whole story

Is Britain to sail alone in the high seas of trade wars?

The Sichuan Province of China presents its cultural treasure to the EU

EU’s Finance Ministers draft plan to raise tax bills of online giants like Google and Amazon

ECB’s unconventional monetary measures give first tangible results

COP21 Breaking News: “There is an ecological debt that the world needs to pay back to Africa”, French President Francois Hollande promises 2 Billion euros by 2020 from Paris

Can Eurozone’s uncertain growth answer the challenges that lie ahead?

Commission: Raising the social issues that can make or break the monetary union

G20 LIVE: World Leaders in Turkey for G20 Summit. Global Economy will be discussed in Antalya

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 )

w

Connecting to %s