Berlin-Paris tensions re-emerge as ECB ponders stimulus

02.09.14 @ 09:29

  1. By Benjamin Fox
  2. Benjamin email

BRUSSELS - European Central Bank chief Mario Draghi is testing the mood of EU governments as he ponders whether to unleash a new wave of monetary stimulus to boost the eurozone's struggling economy.

  • Draghi (r)- testing the mood ahead of Thursday's ECB board meeting (Photo: Council of European Union)

On Monday (1 September), French officials said that Draghi and President Francois Hollande shared the same "worry about growth and inflation" in the eurozone, following talks between the two in Paris.

Draghi had discussed the bank's options with Germany's Angela Merkel earlier in the day.

The European Central Bank's executive board will meet this Thursday (4 September) amidst a backdrop of increasingly dismal economic figures for the eurozone.

On Monday the Purchasing Managers' Index for manufacturing fell to 50.7 percent in August, its lowest rate in more than a year, although it remained above the 50 point threshold which indicates growth rather than contraction.

Fears about the ongoing Ukraine crisis and the sanctions battle between the EU and Russia have prompted a collapse in business confidence.

Inflation, meanwhile, has hit a low of 0.3 percent, well below the ECB's target rate of 2 percent.

The ECB is poised to follow the path trodden by the US Federal Reserve and the Bank of England by launching a bond-buying programme in a bid to stimulate more economic activity, although it is unclear whether this will start before the end of 2014.

Meanwhile, a new four-year programme of cheap loans for banks if they promise to increase lending to businesses is expected to begin this month.

Policy makers are once again under intense pressure to stave off a spiral of economic stagnation, high unemployment and very low inflation across the eurozone, which threatens to reignite the ideological argument between austerity-focused Germany and the likes of France and Italy, who propose new stimulus measures to drive economic growth.

During a speech in the US last month Draghi called on eurozone treasuries to take fresh steps to boost demand amid signs that the bloc’s already tepid recovery has ground to a halt. He also signalled that the Frankfurt-based bank would do more to tackle low inflation across the bloc.

But while these comments have been welcomed in Paris and elsewhere, they received a cool reception in Berlin.

"I don't think the ECB has the instruments to tackle deflation to be frank," German finance minister Wolfgang Schauble told Bloomberg last week. "Monetary policy can only buy time", he said, adding that the bank had "come to the end of its instruments".