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.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

The Syrian knot cannot be cut without devastating consequences

Auditors say EU spending delivers limited value for money but the timing of their report poses questions

The Italian ‘no’ and France’s Fillon to reshape Europe; Paris moves closer to Berlin

Youth Forum welcomes European Commission proposal to speed up financing for youth employment

Yesterday’s “jokes” and sarcasm by Digital Single Market’s Vice President Ansip on EU member states’ right to protect their telco markets

Europe led by Germany seems vulnerable to Trump’s threats

Trump’s blasting win causes uncertainty and turbulence to the global financial markets

The EU Parliament blasts the Council about the tax dealings of the wealthy

ECB should offer more and cheaper liquidity if Eurozone is to avoid recession

German political spillovers: ECB’s Draghi resists first attacks by AfD

Why are the financial markets shivering again?

Brexit is happening now but the UK hasn’t really assessed the impact of a “no-deal” divorce

G20 LIVE: World Leaders in Turkey for G20 Summit. Global Economy will be discussed in Antalya

EU leaders agree on 2030 Climate and Energy Package: is “flexible” brave enough?

Worldwide consumer confidence has shot up to its highest level for four years according to a survey of 130 Global Retail leaders

“Austerity was not the alternative!”, President Hannes Swoboda of the European Socialists and Democrats on another Sting Exclusive

How ‘small’ is Europe in Big Data?

Why is Grexit again in the news? Who is to pay for Eurozone’s banking problems?

A Sting Exclusive: Paris Climate Change Summit, a defining moment for humanity, by Ulf Björnholm Head of UNEP Brussels

It’s Trump’s anti-globalization and inward-looking rhetoric that perturbs GOP and US

Four major resources for new European young entrepreneurs

A Sting Exclusive: “One year on from the VW scandal and EU consumers are still in the dark”, BEUC’s Head highlights from Brussels

Any doubt?

The EU condemns Faroe Islands and Iceland to poverty

Banks get trillions and the unemployed ECB’s love…

The EU Commission predicts a decimated growth in the next years

A Valentine’s Special: heart has nothing to do with it, it’s all Brain

Bundestag kick starts the next episode of the Greek tragedy

COP21 Breaking News_10 December:#ParisAgreement: Points that remain in suspense

ITU Telecom World 2018 takes place in Durban, South Africa

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

Counting spillovers from the fast track EU-US free trade agreement

‘Two pack’ austerity package in force but with less vigor

The EU invites the US and Russia to partition Ukraine

A Sting Exclusive: “eHealth can change many dimensions of how the healthcare area functions”, Polish MEP Michal Boni underscores from Brussels

Trump stumbles badly on his Russian openings; Europeans wary of Putin

Global Citizen – Volunteer Internships

How bad could British healthcare get for its citizens abroad post-Brexit?

Is a deal over EU budget possible today?

Eurozone to enter the winter…

Access to healthcare: what do we lack?

GREXIT final wrap-up: nobody believed Aesop’s boy who cried wolf so many times

Donald Trump’s victory is a great opening for global EU leadership on the sustainability agenda

Family incomes stagnate in the EU; people excluded from ‘moderate recovery’

New skills needed for medical students in Industry 4.0

MWC 2016 LIVE: Verizon boasts momentum for IoT platform

Azeri natural gas will keep the EU warm soon

The battle for the 2016 EU Budget to shake the Union; Commission and Parliament vs. Germany

Social Entrepreneurship in the times of the refugee crisis

Ukraine’s new political order not accepted in Crimea

Mobile young people create the European labour market of tomorrow

Europe’s far-right launches attacks on neighboring nations

A Sting Exclusive: “Paris is indeed our best bet for a secure climate future”, EU Commissioner for Environment Karmenu Vella cries out from Brussels

A strong European Union is a united European Union

The Bank of China at European Business Summit 2015

Zhua Zhou: Choosing The Future

The Ecofin Council creates officially the clan of ‘undead’ banks

China invites the EU to a joint endeavor for free trade and order in the world

Mental health of health professionals: the alter ego

Cyber defence: MEPs call for better European cooperation

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