Draghi keeps the euro cheap, helps debt refinancing, recapitalization of banks and growth


European Central Bank Press Conference – 14 December 2017. Mario Draghi, President of ECB (in the middle) and Vítor Constâncio, Vice-President of ECB (on the right), walk towards the Conference room. (ECB audiovisual services, some rights reserved).

Last Thursday, the European Central Bank decided to keep flooding the Eurozone with hundreds of billions, despite strong objections coming from the frugal German-Dutch duo. Mario Draghi was adamant about that. It’s interesting to follow his response to a journalist’s remark, who reminded him that the “Dutch Central Bank President Klaas Knot said in a speech late November that the asset purchase program has run its course”. Draghi didn’t hesitate and swiftly answered, “As regards your first point that is not the view of the Governing Council”. Clearly, the Dutch central banker had expressed his negative views about the extraordinarily generous monetary policy, but he didn’t convince the majority of the Council.

Last week, however, it was not only the Dutch central banker who had reservations about ECB’s continued money printing. Again, it was a journalist who pointed out to Draghi that “some of your colleagues – like Mr Coeuré or Mr Weidmann or Mr Knot – have expressed confidence that the asset purchases will end in September; do you share their view?” Again, Draghi was unwavering: “We didn’t discuss this today, by the way, but the last discussion we had a month-and-a-half ago showed that the Governing Council, its vast majority, wants to keep, to retain the open-endedness feature of the asset purchase program (APP) as it’s been designed in the last monetary policy council”.

Keeps printing cheap euros

The ECB under APP has so far printed and spent €2.5 trillion, in buying government and corporate bonds mainly in the secondary markets. A month-and-a-half ago, the bank’s Governing Council decided to continue this net asset purchases under APP, at a monthly pace of €30 billion, until the end of September 2018. At that time, ECB had also decided to continue this program beyond September 2018, “if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”.

Alongside more money printing, the ECB keeps its main interest rate fixed at zero. In relation to that, the central bank’s Governing Council has also clarified it “expects the key ECB interest rates to remain at their present levels (n.b. zero) for an extended period of time, and well past the horizon of the net asset purchases (September 2018)”.

Extraordinarily accommodating

Not without reason then market commentators have termed these ECB measures as ‘extraordinarily accommodating’. Of course, the term accommodating refers to the real economy, but in fact monetary policy is realized through banks. So, in the foreseeable future, the ECB plans to continue refinancing the banks at zero interest rates. It will also keep offering them €30bn a month through purchases of bonds the lenders keep in their vaults, and all that at least until next September (and if necessary beyond). Theoretically, ECB’s ‘money for free’ for the banks has helped the real Eurozone economy to recover and grow for a third year in a row.

In practice though, this policy primarily helps the banks to recapitalize themselves, since they are still dangerously underfunded and the capital markets have definitively denied undertaking that task, on a healthy risk/return bases. So, the ECB extraordinary money printing and handing billions to banks, primarily helps Eurozone’s banking system recover. If this policy has helped the real economy to recover is questionable. Draghi says it did. He has more goals to serve though with this unprecedented monetary policy. Those are the easier and cheaper refinancing of the over indebted member states of Eurozone as well as keeping the euro/dollar parity at bay.

The three targets

The entire Southern region of euro area, comprising Italy, Greece, Spain, Portugal and also Ireland and why not France, would have had difficulties in refinancing their public debts hadn’t the ECB insisted on this ‘free money’ policy. However, Germany and Holland, as the only surplus countries, would have preferred the opposite. That is a policy of higher interest rates, for their hoarded deposits, to produce higher returns. Instead, the ECB has chosen a policy of plenty and zero cost money, on the right assumption that the refinancing of public debt at a reasonable cost and the recapitalization of the lenders should be the prime targets. It’s not only that. There is a third, equally important goal.

More printing of zero interest rate yielding euros also keeps the single money’s parity with the dollar at bay. To be reminded, the euro/dollar rate in the more distant past had oscillated in the expensive region of 1.65 to 1.40. Over the recently past years, however, this rate has dropped to 110 -120 American cents. Obviously, a cheaper euro helps Eurozone’s weaker economies to export more and thus grow faster. On the other side of the fence is again the German export machine which doesn’t need a very cheap euro to function well. On top of that, Germany’s accumulated reserves of more than a trillion would have valued more in dollar terms at a higher parity. Yet, the ECB has to cater for the more pressing Eurozone needs and this is not going to change.

This is the least Germany can accept to keep Eurozone in one piece, since her total rejection of the issuance of a Eurobond or the appointment of a European Minister of Finance, echoes loudly and negatively all over Europe.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

MARKUP initiative to boost market access to Europe for East African SMEs

Protectionism doesn’t stand a chance in the age of connectivity

How India is harnessing technology to lead the Fourth Industrial Revolution

Could the fourth wave of globalization help to end epidemics?

‘Unconscionable’ to kill aid workers, civilians: UN Emergency Coordinator

France fails again the exams. Kindly requested to sit in on Commission’s class

Cyclone Idai: UNICEF warns of ‘race against time’ to protect children, prevent spread of disease in flood-ravaged Mozambique

COP21 Breaking News_08 December: Cities & Regions Launch Major Five-Year Vision to Take Action on Climate Change

Yemen consultations have started, insists top UN negotiator

COP21 Breaking News_03 December: There is a new draft agreement on the negotiating table

‘BioSolar Leaves’ are better at cleaning the air than trees, say the technology’s developers

European Defence Fund on track with €525 million for Eurodrone and other joint research and industrial projects

Jade Spring Meeting 2017 – day 2: Coporate workshops, general assembly and magna moment

Drone regulation is necessary to democratize the sky for humanity

IMF launches a new offensive against Germany

More progress needed on reducing and redesigning agricultural support policies

The middle-class dream is moving beyond millennial reach

We need to talk about mental health at work, say employees

Yemen hospital airstrike under investigation amid resurgence of deadly cholera

A geared turbofan at Pratt & Whitney's production hub in West Palm Beach (copyright: Pratt & Whitney - a UTC Company- 2018; Source: Pratt & Whitney's website, media center)

The EU Commission approves UTC’s acquisition of Rockwell Collins under conditions

FIAT Chrysler: from Geneva Motor show to the World, and back

We’ve lost 60% of wildlife in less than 50 years

The UN went to one of the world’s richest countries to look at poverty – this is what it found

‘Let the children live’: UN prepares to ramp up food aid to Yemen as famine risk grows

EU Copyright Directive: Google News threatens to leave Europe while media startups increasingly worry

EU secures more and cheaper energy supplies

Draghi tells the Parliament the ECB to use all its weaponry; euro slides to parity with the dollar

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

‘Complacency is still strong’ over stopping genocide, says top UN adviser

Brexit Update: EU endorses unprecedented compromise to help Cameron out of the referendum mess he got himself into

Can the EU last long if it cuts Cyprus out?

Libya detention centre airstrike could amount to a war crime says UN, as Guterres calls for independent investigation

What can Darwin teach the aviation industry about cybersecurity?

This project is turning abandoned fishing gear into volleyball nets

Four in 10 indigenous languages at risk of disappearing, warn UN human rights experts

Ukraine: Temperatures plunge amid rising humanitarian needs

Predatory labour taxation not an issue for the Commission

One billion people have preventable eye conditions, increasingly linked to lifestyle choices: UN health agency

Berlin’s governing elite leads Eurozone to recession to win the September election in Germany

GSMA Announces Speakers for Mobile 360 – Russia & CIS 2018

Court of Auditors: EU spending infested with errors well above the materiality threshold of 2%

Greek citizens to pay the price again but Tsipras risks losing next elections

Discussion at Europe House: Brexit & Food

The Sahel is engulfed by violence. Climate change, food insecurity and extremists are largely to blame

Medicine in the 4th Industrial Revolution: the third entity of the new doctor-patient relationship

Haitian Foreign Minister calls for development reboot to close ‘striking gap’ between promises and action on ending poverty

Globalization 4.0 must provide for the poorest, or it risks causing chaos for everyone

Will GDPR block Blockchain?

The Peoples are missing from EU’s monetary union

Will ECB win against low inflation by not following Quantitave Easing?

Ηealth’s foundation is falling apart: what can we do about it?

‘Alarming levels’ of methamphetamine trafficking in Asia’s Mekong, UN warns

#TwitterisblockedinTurkey and so is Erdogan

Spain will soon overtake Japan in life expectancy rankings. Here’s why

‘Global trust’ declining, ‘our world needs stepped-up global leadership’

We need new tools for the Big Data era

The 28 EU leaders don’t touch the thorny issues

The UN’s unyielding effort to tackle sexual abuse and exploitation: our quarterly update

Brussels to tear down the trade wall with Mexico as opposed to Trump’s “walls”

Brexit: PM May must hush Boris Johnson to unlock the negotiations

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 )

Connecting to %s