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

the sting Milestone

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

Hate speech exacerbating societal, racial tensions with ‘deadly consequences around the world’, say UN experts

Ben Stiller’s new role, more about hope than humour, as he’s named Goodwill Ambassador for UNHCR

Germany is trying to rescue its fabled forests from climate change

COP21 Breaking News_10 December: UN Climate Chief Calls for Final Push to Meet Adaptation Fund Goal Very Close to Target

Three ways Finland leads the world – and education isn’t one of them

Guinea-Bissau spotlights threats of organized crime, Sahel terrorism in speech to UN Assembly

India’s future as a world power depends on 4 key relationships

Right2Water initiative: Is the Commission ready to listen to citizens?

“Beyond the beach: tackling plastic pollution upstream”, a Sting Exclusive by Erik Solheim, Head of UN Environment

Roxane in Cambodia

Will Eurozone be able to repay its debts? Is a bubble forming there?

UN Security Council calls for South Sudan leaders to speed up action on peace deal

The EU stops being soft with 10 Downing Street about Brexit

Releasing trapped value is key to success in the digital world

Under-fives’ daily screen time should be kept to 60 minutes only, warns WHO

Scores killed in ‘barbaric’ attack on Mali village, UN chief urges restraint, calls for ‘dialogue’ to resolve tensions

A new crop of EU ‘Boards’ override the democratic accountability and undermine the EU project

WEF Davos 2016 LIVE: “It is the implementation, Stupid!”, German Finance Minister Wolfgang Schaueble points the finger to Greece from Davos

COP21 Breaking News_12 December: 195 countries adopt the First Universal Climate Agreement

ITU Telecom World 2016: it’s all about working together

Ten reasons to be optimistic in 2019

Europe faces economic turmoil as Italy gets closer to the Excessive Debt Procedure

Intel, Almunia and 1 billion euros for unfair potatoes

Mario Draghi quizzed for last time by Economic and Monetary Affairs Committee

Main results of European Council of 18/10/2018

Promoting gender equality a ‘crucial contribution’ in effort to restore, protect our planet’s oceans

The Europeans back Russia-Turkey on Syria: A ‘Waterloo’ for Saudis and their Crown Prince

Texting is a daily source of stress for 1/3 of people – are you one of them?

Humanitarian crisis in Yemen remains the worst in the world, warns UN

2nd Global Consultation on Migrant Health 21-23 February 2017 in Sri Lanka

AI will drive the societies of the future. Will the governed consent?

How venture capital can transform global health

What Ghana can teach us about integrating refugees

Moves to create a Kosovo army have ‘deteriorated relations’ with Serbia: UN peacekeeping chief

UN urges ‘maximum restraint’ as Israel-Hamas tensions rise over rocket attack

Privatization and public health: a question of Human Rights

Climate change is a disruptor. Here’s how to harness it for innovation

Across the world, women outlive men. This is why

Civilian death toll continues to mount in Syria, UN relief chief tells Security Council

China is picking up the fight against rare diseases

When it comes to envirotech adoption, NGOs can lead us out of the woods

UN experts cite ‘possible exploitation’ of workers hired to clean up toxic Japanese nuclear plant

Will the EU reconsider Frontex’s role in light of accusations about violations of migrants’ human rights?

ECB’s billions fortify south Eurozone except Greece; everybody rushes to invest in euro area bonds zeroing their yields

Commission reviews relations with China, proposes 10 actions

UN General Assembly President upholds value of multilateralism in speech closing annual debate

Gender parity can boost economic growth. Here’s how

How tech can help businesses balance profit and purpose

New round of bargaining for the 2014 EU budget late in autumn

More women in Latin America are working, but gender gap persists, new UN figures show

International partners pledge $1.2 billion to help cyclone-hit Mozambique recover, ‘build back better’

Border management: EU signs agreement with Montenegro on European Border and Coast Guard cooperation

Making money from meeting the SDGs? An overarching approach to sustainable development.

Who is to lose from the 6-month extension of the EU economic sanctions against Russia?

Thursday’s Daily Brief: ambulance attack in Libya, #GlobalGoals defenders, human rights in Cambodia, Swine Fever

Direction Wakanda: finance methods to make Africa a superhero continent

Hunger in Yemen: WFP considers aid suspension in face of repeated interference by some Houthi leaders

More electric cars on EU roads by 2030

Can Eurozone’s uncertain growth answer the challenges that lie ahead?

Music is a vital urban resource. How do we plan for it?

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