Last Thursday, 12 December, Mario Draghi, President of the European Central Bank, was forced to compromise with the Germans during the Governing Council’s regular meeting. He accepted to reduce the monthly injections of cash into the economy (through asset purchases of mainly government bonds) from €80 billion to €60bn, along the lines of the nonstandard monetary policy measures or quantitative easing.
The program was introduced in March 2015 in order to revive the ailing Eurozone economy and support the over borrowed member states like Italy, by reducing the cost of their refinancing. In this respect, the ECB remains a true, effective and equitable European institution, working for the entire Eurozone and not only for its more powerful member states, as Germany wishes.
Germany wants it all
Right from the beginning though, Germany strongly opposed and fought Draghi’s non conventional monetary policy initiatives. Berlin acted quite egotistically and strictly, looking just after its own interests, paying no attention to the needs of the rest of Eurozone member states. Let’s see why and how this happens. Germany is by far the largest saver of the Eurozone, having accumulated at least €1.75 trillion in reserves, accrued from trade surpluses coming regularly in at a pace of around €250bn a year. Of course, the largest part of those surpluses is paid for by the rest of the EU member states. Selfishly though, Germany, being the largest hoarder of Europe, opposes any reduction of interest rates and doesn’t care if the refinancing costs for its euro area peers net borrowers suffocate their economies.
Last Thursday however, Draghi must have fought back effectively and announced that the program albeit smaller will be extended beyond March 2017, until the end of next December and added that “If, in the meantime, the outlook becomes less favorable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration”.
Draghi is there
A very intense confrontation must have take place during last Thursday’s ECB Governing Council. The very first question at the Press conference, which traditionally is held afterwards, was about that. Draghi was asked by a journalist, if other proposals were discussed about the continuation of the extraordinary monetary measures beyond March 2017, when the current program ends. He said “Yes, the two options that have been presented were the ones that had been studied by the committees in the preceding months. One foresaw the option of continuing with €80 billion a month for six months, and the other one is the one that received a very, very broad consensus by the Governing Council”.
To be reminded that, the latter option foresees the continuation of the nonstandard monetary measures for nine months at the reduced rate of €60bn a month. Simple arithmetic tells us that the option which was finally adopted, foresees €60bn more in asset purchases by ECB (€80bn for six months = €480bn, compared to €60bn for nine months = €540bn). Reportedly, the lower option was backed by Germany and a few of its close followers. However, the Governing Council is made up by 25 members (the six members of the Executive Board, plus the governors of the national central banks of the 19 euro area countries) a rather large number of responsible people to be decisively influenced by Berlin. So they decided to spend €60bn more.
They decided to spend more
The option finally adopted (less for a longer period) was rather wrongly judged by markets as a rather tampered option, foretelling the phasing out of the program. In view of that, Draghi made painstaking efforts to convince the journalist present and, through them, the markets, that this change in asset purchases doesn’t amount to a gradual ending of it. He repeatedly explained that “If, in the meantime, the outlook becomes less favorable …the Governing Council intends to increase the program in terms of size and/or duration”.
In any case, money markets cut the euro/dollar parity down a bit. The euro fell by more than 1% just after Thursday’s Press conference in Frankfurt. The important lesson though, is that Berlin keeps countering Draghi’s initiatives to revive both the dying inflation rate and GDP growth in Eurozone. By the same token, Draghi longs to keep the euro parity with the dollar close to unit to facilitate exports and also help the over-borrowed euro area states to refinance their debts at a lower cost, by keeping interest rates at levels close to zero.
In all those fronts, Berlin is positioned on the other side of the fence. Germany continues to insist that fiscal austerity even in surplus member states like herself and restrictive monetary policy is the best policy mix for Europe. The German governing elites in politics and the economy seem to not understand, that this line of action leads to political and social stalemates all over the EU.
They refuse to see that if there is no change of course, soon Italy, Greece and probably also Spain and Portugal will be ungovernable to say the least. The same is true but in an equally dangerous manner for many northern EU member states. In Austria, the extreme right semi-fascist Presidential candidate received 47% and in Holland the extreme right, Eurosceptic, xenophobic and aggressive Geert Wilders Freedom Party is the largest political force.
Unfortunately, there are indications that Germany cannot and will not change course, and very probably will lead mainland Europe to a new and quite destructive standoff as it has done in the past.