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

Advertising

Featured Stings

Here are six bold ideas to accelerate sustainable energy innovation

2019 EU Budget: Commission proposes a budget focused on continuity and delivery – for growth, solidarity, security

EU Parliament: It takes real banks to fight unemployment and recession

Eurozone: Austerity brings new political tremors

EU members commit to build an integrated gas market and finally cut dependency on Russia

ECB: Monetary policy decisions

G20 LIVE: “International communities and leaders have great expectations for 2016 G20 summit in Hangzhou China”, Mr Wang Xiaolong, the Chinese Foreign Ministry’s special envoy stresses live from G20 in Antalya Turkey

Utmost hypocrisy emitted by EU’s energy regulation

Changing for the change: Medicine in Industry 4.0

Eurozone stagnates after exporting its recession to trading partners

Road use charges: reforms aim to improve fairness and environmental protection

The Sichuan Province of China presents its cultural treasure to the EU

Leading Palestinian legislator calls for ‘new international engagement’ in two-state solution

Is it true that the G20 wants to arrest tax evasion of multinationals?

Manufacturers Get Smarter for Industry 4.0

In Washington D.C., Guterres signs pact with World Bank, meets US President Trump

EU is now giving Google new monopolies to the detriment of European citizens and Internet companies

European Youth Forum welcomes strong stance on human rights in State of the Union

A Sting Exclusive: “Consumer expectations for the 2015 UN summit on climate change”, Director General of BEUC Monique Goyens outlines from Brussels

Youth and children in Europe set the new perspectives for the decades to come

EU seeks foreign support on 5G from Mobile World Congress 2015 as the “digital gold rush” begins

The European Internet is not neutral and neither is the Commissioner

The 13th round of TTIP negotiations hits a wall of intense protests and growing concerns

Young and unemployed the perfect victims of ‘vultures’

What have the banks done to the markets making them unable to bear cheap oil?

Cancer research put at risk by General Data Protection Regulation? The possible dangers of a data privacy EU mania

Greece returns to markets at a high cost to taxpayers, after four years out in the cold

Brexit: UK business fear of a no-deal scenario preparing for the worst

EU Budget: A Reform Support Programme and an Investment Stabilisation Function to strengthen Europe’s Economic and Monetary Union

The EU stops being soft with 10 Downing Street about Brexit

European markets itchy with short-term disturbances

Building an Inclusive ICT Innovation Ecosystem

European Parliament calls on Russia to end occupation of Georgian territories

European Youth Forum warns of a Peter Pan generation as a result of financial crisis and response to it

Why youth unemployment is so difficult to counter

Working Muslim women are a trillion-dollar market

Entrepreneurship in a newly shaped Europe: what is the survival kit for a young Catalan and British entrepreneur in 2018?

Environment Committee MEPs vote to upgrade EU civil protection capacity

We need a new Operating System for the Fourth Industrial Revolution

The US repelled EU proposals on common rules for banks

UN rushes to deliver aid as key Yemeni port city is ‘shelled and bombarded’

Microsoft’s YouthSpark: a kiss of Life to European Youth from the European Parliament

UN chief welcomes start of Church-mediated national dialogue in Nicaragua

Solitary Britain sides with US aggressing Russia and chooses hard Brexit

Economic sentiment and business climate stagnate in miserable euro area

Pro-EU forces won a 70% triumph in the European elections

The Social Committee may accept the new ‘contractual’ Eurozone

Turkey to let EU alone struggle with the migrant crisis while enhancing its economic ties with Russia instead?

A Sting Exclusive: “Change is challenge, change is opportunity”, Commissioner Bienkowska cries out live from European Business Summit 2015

Is the ECB ready to flood Eurozone with freshly printed money?

Young people demand a transparent job market: new campaign launches on international interns day

ILO’s Bureau for Employers´Activities to publish new study on women in business and management

Trade protectionism and cartels threaten democracy

Dark spots on EU humanitarian aid spending

Inflation down to 0.7%, unemployment up at 12.2%: Bad omens for Eurozone

AIESEC @ European Business Summit 2014: The Digital Era: A New Business Frontier

JADE Generations Club 2015: Knowledge vs. competences – Do not wait for the change to happen, but make it happen

Everybody for himself in G20 and IMF

Can one FTA and 110 lobby meetings make the dirty oil clean in Europe?

AIESEC @ European Business Summit 2014: European Youth, Change Now Patiently

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 )

w

Connecting to %s