For how long and at what cost can the ECB continue printing trillions to keep euro area going?

European Central Bank Governing Council meeting in Vienna Austria, 2 June 2016. (ECB audiovisual services).

European Central Bank Governing Council meeting in Vienna Austria, 2 June 2016. (ECB audiovisual services).

Last Tuesday Eurostat, the EU statistical service issued a Press release revealing that the GDP of Eurozone (EU19) and EU28 rose in the first quarter of this year by 1.7% and 1.8% respectively, compared with the same three-month period of 2015. On the yearly developments platform, there is more good news. The same source revealed that the volume of retail trade (adjusted for seasonal variations and price differences) increased by 1.4% in the euro area and by 2.4% in the EU28 this April, in comparison to the same month of the previous year.

Unfortunately, that’s all the good news there is. On a quarter to quarter basis the rises of GDP are much smaller or even negligible: 0.6% and 0.5% in EU19 and EU28 correspondingly. There is more bad news. On a monthly basis, the volume of retail sales in the euro area remained stagnant. On top of that, the industrial prices in March fell to the detriment of producers in both the EU19 and the EU28 this April in comparison to March.

Is it that bad?

However, the GDP and the retail sales rises on a yearly basis are not at all negligible. Given that GDP is the key variable for every economy and the standard base to follow it is the yearly one, increases of the order of 1.7% and 1.8% are not a bad record at all. In this platform, Mario Draghi, the President of the European Central Bank has a lot to say. Last week, when he was in the Austrian capital, Vienna, for the Governing Council meeting, he revealed that the ECB’s extraordinary monetary measures have a sizeable positive effect on euro area’s GDP growth. Let’s see to that.

In detail, on 2 June in Vienna, Draghi delivered a groundbreaking speech at the ceremony to mark the 200th anniversary of the Oesterreichische Nationalbank, Austria’s central bank. He said ”the impact of our measures on euro area GDP is also estimated to be sizeable, helping raise output by around 1.5% in the period from 2015-2018”. He then continued “The latest data show that these positive effects are only gaining in strength as our measures work their way through the economy”.

Paper trillion growth

Of course, a 1.5% increase of GDP in the four year period of 2015-2018 is not much, but without it the overall growth would have been quite negligible. Draghi also confirmed that the ECB’s extraordinary monetary policy had hindered the inflation rate from diving into the negative part of the chart even from 2015. To be noted, that since February this year the headline inflation in the Eurozone is stuck in the negative area.

He added that, in 2016 and 2017, on a full yearly estimate, inflation would end up half a percentage unit lower than the current forecasts, if it was not for ECB’s ‘asymmetric’ monetary tools. No doubt the additional hundreds of billions the ECB plans to inject in the economy until March 2017, are helping the real economy avoid the worst.

The zero interest rate policy of ECB and the almost one trillion it has so far injected into the financial system have already had positive effects on investment and consumption. According to Draghi, during the last quarter of 2015, for the first time investments surpassed consumption as the main driver of growth. This is a clear indication of the help to the real economy from ECB’s monetary policies.

Is it enough?

Whatever the positive results of ECB’s trillions on the real economy, the truth remains that the core of Eurozone’s economy, the industrial sector, still suffers of clear symptoms of stagnation. According to Eurostat, industrial producer prices fell by 0.3% and 0.2% in the euro area and the EU28 respectively in April, compared to March. All first year students of economics know that a fall in prices is not a good omen for every sector of the economy.

Regrettably, the down trend of prices in EU’s industrial sector is not a short-term problem, which may change course over the next month or months. An illustrative diagram of Eurostat shows that industrial prices, excluding energy products, have kept falling for twelve months now, since July 2015. Including energy products in the picture and the fall trend is more than three years long. Obviously, the European industry suppresses its price levels in order to maintain or even increase the volume of its sales.

More negative effects

In the long run though, this practise may prove to be not healthy at all. For one thing, it may lead to a decrease of real wages and thus start a deflationary spiral, if this is not already happening. Such a dangerous development may trigger a new recession that the extraordinary ECB monetary measures would not be enough to reverse.

In conclusion, ECB’s spending so far has, up to now, supported the euro area in avoiding a long period of negative inflation and of zero or negative growth. The question is for how long and up to what amount of money can this arrangement offer the same support, without creating more problems? And those problems are no other than the danger of more market bubbles, which can burst any time, like Lehman Brothers did, and send us all to the brink of abyss.

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