The ECB must extend its money stimulus beyond 2018: Draghi reckoning

Mario Draghi, President of the ECB (on the right), bits farewell to Vítor Constâncio, the Portuguese Vice-President of ECB, who is to be succeeded in Vice Presidency by the Spaniard Luis de Guindos. ECB Press conference of 26 April in Frankfurt am Main. (Photo, ECB work; some rights reserved).

Last Thursday, 26 April Mario Draghi, tactfully left it to be understood that Eurozone may not any more grow so fast as we all knew it was doing until recently, and, consequently, the inflation goal of close to 2% may not be achievable. He communicated that by not repeating what he had said on 8 March, when he had clearly stated, “This outlook for growth confirms our confidence that inflation will converge towards our inflation aim”. Last Thursday, instead of ‘confirms’, he said  “continues to support our confidence that inflation will converge towards our inflation aim”.

The intended differentiation between the fullest possible avowal of “confirms our confidence” and the rather optimistic meaning of “continues to support our confidence” was some minutes later further confirmed. He was speaking at the customary afternoon Press conference following the 26 April ECB‘s Governing Council meeting. Right after his initial statement, Draghi was asked by a journalist the following question: “…now that we’ve seen some weaker-than-expected data (about inflation), is there a risk that the variance in inflation could increase and potentially slow down the process of convergence”?

Inflation moves sideways

Draghi responded yes in a clear cut way: “measures of underlying inflation since our last meeting moved sideways. There hasn’t been any convincing upward trend or signs that this upward trend is about to come.” He is adamant here, confirming that the inflation outlook and the wider economic conjuncture have changed and “ there hasn’t been any convincing upward trend or signs that this upward trend is about to come”.

The truth is that the change in Eurozone’s economic prospects has been noticed by all the major analysts since a few weeks ago. They point to the risks to growth from the American trade protectionism and the rise of the euro/dollar parity, impeding the exports of euro area and making imported goods cheaper. All that undermines growth and results in further depressing the already low inflation rate (1.3% in March).

The French were fast to notice – policy wise – what the contrast between the recent change of economic circumstances and the December decision of the European Central Bank signify. To be reminded, at the end of last year, the Governing Council of the central bank had decided to stop its extraordinarily accommodative measures (quantitative easing). However, abandoning this monetary stimulus to growth now, as the Germans persistently demand, will mean a lot of problems for many Eurozone countries including France. So ‘la Banque de France’ reacted swiftly.

The French insist

Francois Villeroy de Galhau, the Governor of the Bank of France stated last week that the European Central Bank shouldn’t bring to an end its extraordinary monetary measures in September, because “growing risks from protectionism, exchange rates or market swings end up depressing inflation”. On principle, the basic mandate of ECB is to bring inflation close but below 2%.

To that end, during the past many years the central bank has printed and circulated €2.5 trillion of new money and kept its basic interest rate at flat zero, thus reviving inflation and at the same time helping growth.  Stopping this monetary stimulus to economic activity and ending the endeavor to revive inflation at this point in time is then a flagrant violation of ECB’s mandate.

Last December, ECB’s Governing Council on the insistence of Germany and her few Eurozone followers, decided to stop this accommodative policy, since they considered that the euro area economy was already growing fast enough, so the inflation target was reasonably expected to be achieved thereafter. Now, the French, and practically everybody else, say the conjuncture has changed once more and the extraordinary measures are still needed.

Berlin thinks otherwise

To be noted, all along the past years, Berlin has been strongly opposing this extraordinary policy of quantitative easing and the zeroing of interest rates, being the only European country with gigantic reserves. Everybody else in the euro area needed those unorthodox measures in order to refinance their debts at a lower interest cost and leave some space for government spending to support growth. The Eurozone badly needed to recover from the 2008-2010 financial Armageddon. Today the recovery is again uncertain.

Last week, then, de Galhau observed that the Eurozone must now face the new challenges which are bound to suppress growth and inflation again. So, the ECB must continue with its extraordinary measures well beyond 2018 and change its December decision for stricter policies. Obviously, this option is opposed by Germany. Berlin has all along the past years opposed what everybody else needed, despite the fact that the German economy has thrived on exports to the rest of the euro area, and could expect more gains from other people’s better prospects.

What Eurozone needs

There is, then, an evident and disturbing discrepancy between what the German decision makers think about their obligations towards the rest of the Eurozone, and what everybody else expects. Recycling the huge trade surpluses Germany has accumulated from the rest of Eurozone, through investments and more consumption, has been the obvious solution to the woes of the rest of the euro area countries. On top of that, such a visionary policy would, in the long run, further support Germany’s successes. Only the Germans stubbornly refuse to see it. Neutralizing those surpluses by just stockpiling them is a hopeless growth cutter for the entire Eurozone.

During the coming few weeks, we will learn if Berlin is again to win the match game in Frankfurt am Main or if common sense is to prevail. The next meeting of ECB’s governing Council is scheduled for 1st June.

 

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

A Europe that Protects: Commission calls for decisive action on security priorities

How the diaspora is helping Venezuela’s migration crisis

GSMA Mobile 360 Series – Latin America, in association with The European Sting

1 million citizens try to create a new EU institution

Can free trade deliver cheaper renewable energy? Ask Mexico

On the first day of 2019, over 395,000 babies to be born worldwide: UNICEF

Qualcomm to be the next target of EU antitrust regulators? China might be the answer

Scoring for the environment: what Mathieu Flamini’s top-flight football career taught him about leadership

CEOs in these countries are more likely to go with their gut

Pandemic mental health: the urgency of self-care

Financing fossil fuels risks a repeat of the 2008 crash. Here’s why

Changing how we produce and consume: New Circular Economy Action Plan shows the way to a climate-neutral, competitive economy of empowered consumers

Your smartphone may know more about your mental health than you

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

Gig workers among the hardest hit by coronavirus pandemic

EU budget: Reinforcing Europe’s cultural and creative sectors

Stepped-up efforts needed to combat pneumonia; save nearly nine million children’s lives

COVID-19: What to know about the coronavirus pandemic on 6 April

Brexit and migration dominates the debate on October’s EU summit

EU-Turkey relations: Will Turkey manage to revive the EU accession process talks?

European Semester Autumn Package: Creating an economy that works for people and the planet

Burundi: Inclusive dialogue ‘only viable option’ for resolving country’s political crisis says, UN envoy

EU Youth Conference in Amsterdam: enabling young people to engage in a diverse, connected and inclusive Europe

Africa-Europe Alliance: first projects kicked off just three months after launch

Here are 4 of the most politically charged World Cup games ever played

This chart shows the total number of COVID-19 cases and recoveries so far

Supporting the recovery: MEPs adopt budget priorities for 2021

This is how the Western Balkans will become more innovative

EU out to conquer African Union summit

Nearly half a billion people can’t find decent work; unemployment set to rise: new UN labour report

With potential to boost profits by up to 20 per cent, a woman’s place is at work, says UN labour agency

Junior Enterprises as a solution for Youth Entrepreneurship

Spring 2019 Economic Forecast: Growth continues at a more moderate pace

UN chief condemns suspected Boko Haram attacks targeting Eid al-Fitr celebrations in Nigeria

IMF: The near-term outlook for the U.S. economy is one of strong growth and job creation

Capital Markets Union: Making it easier for insurers to invest in the real economy

Germany loves a strong euro; the new Fiscal Councils can deliver despite the Greek chaos and a wider questioning of austerity

Can Greece’s devastating economy deal with the migration crisis?

Do men and women really have different leadership styles?

We can build a carbon-neutral world by 2050. Here’s how

New identity cards deliver recognition and protection for Rohingya refugees in Bangladesh

Indonesian tsunami death toll climbs over 400 as Government-led relief efforts are stepped up

These 11 EU states already meet their 2020 renewable energy targets

International Court of Justice orders Pakistan to review death penalty for Indian accused of spying

Mother of all mergers between Facebook Messenger, WhatsApp and Instagram: EU Data Privacy restrictions against Facebook’s imperialistic plans

Antibiotics are contaminating the world’s rivers

New ECB boss quizzed for the first time by Economic Affairs Committee

MEPs back update of rail passenger rights across EU

Batteries included: how better storage can transform renewable energy

Venezuelan crisis: MEPs reaffirm their support for Juan Guaidó

‘Reasons to hope’ for sustainable peace in Central African Republic – UN Mission chief

Four million Syrian children have only known war since birth: UNICEF

Germany fears that Americans and Russians want to partition Europe again

Radio still a powerful worldwide tool for ‘dialogue, tolerance and peace’: Guterres

More women and girls needed in the sciences to solve world’s biggest challenges

Stronger partnerships with post-conflict countries needed to ensure ‘path towards durable peace’: UN chief

I accidentally went viral on TikTok. I learned we failed our youngest generation.

Code of Practice against disinformation: Commission calls on signatories to intensify their efforts

To retire at 65, American millennials need to save almost half their paycheck

New EU rules cut red tape for citizens living or working in another Member State as of tomorrow

More Stings?

Advertising

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