Draghi left alone with no hope of boosting EU growth as Merkel just focuses on next elections

ECON committee meeting. Monetary Dialogue with President of the European Central Bank.
Copyright: © European Union 2016 – Source : EP Audiovisual Service . Location: Brussels, Belgium.
Date: 26/9/2016

It was last Monday when the president of the European Central Bank (ECB) discussed with members of the economic and monetary affairs committee at the European Parliament (EP) about the EU economy in the aftermath of the UK referendum, revealing that the euro area economy shows notable adjustment properties to the global economic and political uncertainty.

Mario Draghi also urged national governments with more fiscal capacity in their hands, pointing the finger to Germany, to use their surpluses to boost growth and reduce unemployment rates. Otherwise the EU economy will continue weakening and the ECB will try to revive it by further lowering its rates.

ECB’s president slightly intervened in the Brexit talks mentioning that the EU’s single market should be respected and UK should not get any favors. Hence, it is quite clear where the ECB will be standing during the negotiations.

Will low inflation be raised in the medium-run?

The president of the ECB told during his speech at the EP that “eurozone is continuing an economic recovery at a moderate and steady pace but lower than envisaged in June due to a lower foreign demand outlook”. The official forecast figures of ECB regarding inflation rates reveal an increase in the coming few years reaching 1,6% in 2018.

However, the 0,2% inflation rate forecast in 2016 combined with the fact that national governments are not adding considerable growth to the EU economy is making things even harder for the ECB and also for the European citizens. Consequently, it is quite difficult for the ECB’s inflation rate target of 2% to be reached in the medium-run. Furthermore, lowering the interest rates even more for a longer period of time will limit ECB’s conventional tools affecting thus financial stability.

Germany against ECB’s monetary policy

German Finance Minister Wolfgang Schaeuble has been critical against ECB’s policy and Mario Draghi’s statements regarding the unwillingness of Germany to use its surplus and increase spending. Wolfgang Schaeuble blames partly Draghi’s policy on low interest rates to have caused the rise of populist parties.

Hence, the German Finance Minister has urged lawmakers to hold a hard stance against the president of the ECB at the close-door meeting that is taking place today in Berlin. Will Mario Draghi be able to convince lawmakers to change their policy and boost the EU economy by spending more money now or his words will fall on deaf ears leaving once more the ECB alone in the fight for the revival of the EU economy?

Germany’s open fronts

The most powerful economy in Europe is facing too many challenges to be able to provide solutions to each and every problem out there. The refugee crisis, the Brexit, the sluggish EU economy and Deutsche Bank nightmare constitute some of the major risks that Germany tackles at the moment and plays a pivotal role to their solution.

As far as the EU economy is concerned, Angela Merkel and Wolfgang Schaeuble will probably not change their policy especially now that Brexit uncertainty is affecting its economy as UK is the second-largest destination for German exports. What is more, the Deutsche Bank problems have caused serious turbulences to the German administration forcing the German Chancellor to state that she will not bailout the biggest German lender, in an attempt to show that the government is holding tight in view of the coming elections. Deutsche Bank stated two days ago that there is no need for governmental help to settle the 14 billion dollars demand from the U.S. Department of Justice which claims that the bank missold mortgage-backed securities during 2005 and 2007.

However, the statement of Angela Merkel could probably be recalled, which will not be the first one, when and if the German bank cannot settle the above claim on its own putting extra pressure on the German Chancellor to minimise the side effects in the German and European economy. Besides, hasn’t the same happened with Spanish, Portuguese and Greek banks in the past?

Britain should get no exception in EU single market rules

Mario Draghi said among others last Monday that all participating members are “subject to the same rules” respecting the single market. Despite ECB’s resilience after the outcome of the UK referendum on June 23, it is still too soon to judge whether the EU economy has not been or will be affected since the negotiations between Britain and the EU have not yet started and are about to hold for at least two years after Theresa May finally invokes article 50 of the Lisbon Treaty.

Therefore, the president of the ECB is another factor in the Brexit equation that will support existing EU rules with no exceptions for the UK. Particularly, Mario Draghi told the EU lawmakers on this issue: “It is very hard to imagine that any agreement that will be perceived as discriminatory against some subjects or in favour of other subjects could be a source of stability for the future of our EU”.

All in all, the ECB will have to fight sluggish growth and low inflation rates when counties with adequate economic ability express their unwillingness of helping. Germany has its own open internal and external fronts to deal with and Deutsche Bank is among the main issues that could affect Angela Merkel’s popularity in next year’s elections.

But as the ECB’s tools are further limited, inflation rates will remain at low levels. Thus, it seems that the ECB will be left alone at the moment and also that its monetary policy seems incapable of sustaining the bloc’s recovery and thus bolstering growth and demand in the Old Continent.

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