Thursday

20th Jan 2022

Opinion

The ECB: An act of determination or desperation?

  • It’s an old economic controversy: does supply drive demand or is it the other way around? (Photo: Valentina Pop)

In yet another attempt to revive the eurozone recovery and fight low inflation, the European Central Bank (ECB) on Thursday (4 September) emptied its toolbox almost entirely.

With another rate cut, an ABS (asset-backed security) purchasing programme and a new covered-bond purchasing programme, the ECB has now reached a point at which fully-fledged quantitative easing - outright purchases of government bonds, is the only option left.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

  • Carsten Brzeski is Senior Economist at ING Bank (Photo: ING-DiBa)

Now that the ECB has almost entirely emptied its arsenal, the pressing question is: Will it help?

A rate cut by 10 basis points, from almost zero to even closer to zero, will clearly not make a difference for the eurozone economy.

It seemed as if ECB president Mario Draghi wanted to tell banks to go out and subscribe massively to the forthcoming liquidity operations.

But it is doubtful that 10 basis points will really tip the balance for a bank to join the liquidity crowd

As to the new programme to purchase asset-backed securities, this is something the ECB has been talking about for almost a year.

Who should take the risk for any asset purchasing programme was the hot potato in European policymaker circles. It was meant to be anyone but the ECB.

Kick-starter for eurozone?

The ECB's actions show the extent of its concern. It is worried that geopolitical risks and the (under-estimated) structural weaknesses of some bigger eurozone economies have slowed down the already sluggish recovery.

Headline inflation is at a cyclical low and inflation expectations have dropped significantly, at least according to some market-based measures.

The rate cut will not make a difference and given the repayments of earlier ECB liquidity to banks, it is very hard to tell whether the upcoming long-term liquidity provisions (TLTROs) will really be a success.

Asset-backed securities are not always in the hands of banks. Therefore the new purchasing programme will not automatically lead to a deepening of the market. Whether such a programme actually really leads to more credit to the private sector depends also largely on the appetite for new loans.

It’s an old economic controversy: does supply drive demand or vice versa?

Super Mario

All of this means that the success of Thursday’s announcements is far from certain. Even Draghi admitted that monetary policy alone cannot do the job.

Fiscal policies and structural reforms are another major requirement to achieve a sustainable recovery of the Eurozone.

In this context, Draghi back-peddled somewhat from his recent Jackson Hole speech, or at least tried to adjust the interpretations of the speech, by stressing the need for structural reforms and the overarching role of the eurozone’s fiscal rules.

If anyone believed that the ECB had given its blessing for a round of deficit-spending, Draghi proved them wrong.

Since his 'whatever-it-takes' speech two years ago, ECB president has been the master of financial markets. There is an almost unbeatable belief in Draghi’s power and determination not only to save the eurozone (back in 2012) but also to bring it to a sustainable recovery (now in 2014).

Thursday's announcements should have further strengthened this belief.

Even if the long-term effect from the latest measures is far from certain, the short-term effect should be a weaker euro exchange rate, bringing some relief to eurozone exporters.

Draghi will now need support from national governments in the form of stepped up reforms if he does not want to lose his superhero status.

The writer is a senior economist at ING Bank

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Macron's vision will hit EU Council veto buffers

President Emmanuel Macron's address to the European Parliament championed a bold and ambitious pro-European agenda. There is one problem though - the plans rely on a system of governance that has gridlocked the EU for over a decade.

Tomorrow MEPs can end EU animal export horror show

On Thursday, MEPs must press for a ban on all live exports outside the EU, and call for overall journey times within the EU to be limited to four hours for poultry and rabbits, and eight hours for other animals.

Column

An EU-Africa 'equal partnership' must tackle past and present

Competition is fierce and getting African leaders' attention is no easy task. US president Joe Biden has his own Africa summit, and Turkey, Japan, Russia and - most importantly - China, also have Africa forums up and running.

Time to stop China's economic hostage-taking of Lithuania

Simply opening the Taiwanese Representative Office in Lithuania's capital, Vilnius, sparked a large-scale expansion of China's economic warfare against democracies. China's actions amount to a fundamental attack on the DNA of the European Union: the internal market.

News in Brief

  1. MEPs call for full-scale election observers in Hungary
  2. Nato membership 'very unlikely' on her watch: Finland's PM
  3. Germany investigates Green leaders' Covid-bonuns
  4. Officials surprised by Macron's call for seperate EU-Russia talks
  5. Commission to withhold EU funds from Poland in mine row
  6. 'Patriotic millionaires' call for wealth tax at virtual Davos
  7. Borders must not be moved by force, Scholz warns
  8. MEPs demand public consultation on gas and nuclear

Gas and nuclear: a lose-lose scenario for Eastern Europe

The strong advocacy of Central and Eastern European capitals for including fossil gas and nuclear power in the EU's green taxonomy only leads to another unsustainable energy lock-in for the region, leaving their grid exposed to third-country coercion.

Latest News

  1. Macron promises strong EU borders
  2. MEPs to crackdown on digital 'Wild West'
  3. Macron calls for new security order and talks with Russia
  4. Macron's vision will hit EU Council veto buffers
  5. Hydrogen - the 'no-lose bet' for fossil-fuel industry?
  6. Tomorrow MEPs can end EU animal export horror show
  7. An EU-Africa 'equal partnership' must tackle past and present
  8. Metsola becomes youngest EU Parliament president

Join EUobserver

Support quality EU news

Join us