Trailing the US-EU economic confrontation

European Central Bank. Main building in Frankfurt am Main, Germany, illuminated. (Work of ECB Audiovisual Services).

More than one economic pundit felt relieved learning that Eurostat, the EU statistical service last Friday estimated the September CPI inflation in Eurozone at 0.4%, the highest level in two years. Understandably, they think that the stagnating and almost deflationary euro area is leaving behind its grim past, aided by ECB’s liquidity injections of €80 billion, which the central bank adds every month into Eurozone’s undercapitalized banking system. But is it so? Is the euro area leaving behind its gloomy past? Let’s dig into that.

Up to now, the ECB has printed and injected around €1.45 trillion into the European banking system under its non-standard monetary policy measures (asset purchases programs), which kicked off in March 2015. There is more to it though. On 29 June, over the period of just a few hours, the ECB handed €399.29bn to European banks through a credit line called Long Term Refinancing Operations (LTROs).

ECB for a rainy day

That surely was a wet day for all the major European banks (HSBS, Barclays, Royal Bank of Scotland, Lloyds Banking Group, Deutsche Bank, Commerzbank, KfW, BNP Paribas, Crédit Agricole and Société Générale). They lost up to one fifth of their market value in a few hours, paying the price for the Brexit. The banks will keep those 399.29bn, until 4/6/2020 at an almost zero interest rate. They Surely need it to keep them going, but will it be enough? And does the treatment entail any risky side effects?

In normal market conditions, no investor would have lent money to those bankers, at least not at zero interest. But the ECB is not an investor, because its management doesn’t deal with their own money, but with the money of us all. From the day of the Brexit onwards, the ECB keeps generously supporting all the European banks, as was the case on 28th of September. On that day the ECB handed €45.27bn to European banks in a number of LTROs. In reality, there is no end to the daily transfers of money from the ECB to euro area banks.

Dealing with our money

The German banks are ‘regulars’ at ECB, pleading for much zero cost money. This fact though doesn’t prevent Wolfgang Schäuble, the Federal Minister of Finance, from complaining that the ECB is needlessly pushing interest rates too low, depriving the German pensioners who vote for him, from an extra income on their deposits. This means the German politicians who govern the country for at least ten years now want to continue doing so at the expense of ECB.

Obviously, the Berlin governing elite wants the central bank to keep supporting the agonizing German lenders, with hundreds of free billions. At the same time, they use the ECB as their scapegoat, so that they get reelected in the 2017 legislative vote. In short, the German governing elite is now working under a twelve month plan aimed at winning the 2017 election and keeping the lenders going. It includes pressuring the ECB to keep supporting the country’s ailing banks (Deutsche Bank, Commerzebank and KfW) and at the same time demanding that the central bank patiently accepts Berlin’s criticism about spreading around too much money at zero cost. Obviously, the Merkel government doesn’t want to be seen by voters as the rescuer of imprudent and unscrupulous bankers.

The Germans want it all

For this Berlin strategy to work though, the Eurozone has to show some kind of revitalization. Otherwise, ECB’s billions won’t be enough to keep the euro area financial system going until September/October 2017, when Germany is to hold a general election. In this respect, the 0.4% inflation estimate is a sign that Eurozone may have overcome its double problem of stagnation and disinflation.

But the miracle has to continue. If, during the next few months, inflation returns to its usual position around zero, then the Schäuble dream cannot come true. That’s why, from now on, the German government will be the most keen inflation watcher. The Americans will also be watching the Eurozone inflation and they will continue pressing their case against Europe, targeting the Old Continent’s weakest point; its banks.

The Americans won’t stop

If inflation in Eurozone keeps rising towards the ECB’s target of 2% signalling a possible economic upturn, this good prospect will certainly alleviate some banking problems in Europe. In this case, the Americans will increase their pressure on European banks, making sure that it’s just enough to keep the EU lenders at a point between life and death. Obviously, the US doesn’t want Europe dead, but it doesn’t want it strong and obstinate either. In short, inflation will be the gauge of American pressure on European banks, more inflation and growth – more pressure.

But Eurozone keeps faltering

In any case, Eurozone is far from reaching a sustainable growth path. According to a last Wednesday Reuters report, “Euro zone business growth fell last month (September ) to its weakest since the beginning of 2015, according to surveys providing the latest evidence the bloc’s economy is losing momentum”. In short, Eurozone doesn’t seem able to gain a long term economic revitalization course, at least not in the foreseeable future.

Given that, the Americans may compromise with Deutsche Bank and conclude an agreement below their initial proposal for a $14billion fine, as presented last week by the US Department of Justice. Well informed sources in New York say that the Department may accept a German counteroffer for a settlement around $5bn to $5.5bn. This is enough though to soak up all Deutsche’s reserves set aside for litigations. Perceptibly, the Americans don’t want to leave much maneuvering space to Deutsche.

In conclusion, the 0.4% Eurostat inflation estimate for September in Eurozone doesn’t seem to change the current circumstances much. The EU and the US will continue confronting each other in the economic field. Undoubtedly, the Americans have the advantage. This is so not only because the US operates seven mighty war fleets around the world’s oceans, but also because Europe is more dependent on New York’s financial structures than the other way around.