Friday

25th May 2018

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.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

  • 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

The dangers of resurgent nationalism in Greece

Virulent nationalism in Greece has been stirred up in the context of austerity and renewed negotiations with Macedonia. Recent attempts by the government to address the inequalities suffered by LGBT persons have also been met with a reactionary backlash.

Integration of Syrian refugees in Europe needs scrutiny

Most refugee-related services are outsourced to the private sector and NGOs, which are not adequately monitored and evaluated. When governments and EU institutions provide funding for refugee projects, they should scrutinise the NGOs and private players they work with.

Europe's last wild rivers under threat at Balkans summit

The EU is prioritising motorways and gas pipelines across the potential accession Western Balkan countries, plus hydropower energy projects which threaten one of the world's freshwater biodiversity hotspots.

More commitment to renewables from Council, please

More and more consumers are likely to invest in solar panels in the future as it becomes simpler to produce one's own electricity, writes Monique Goyens, director general of BEUC, the European Consumer Organisation.

News in Brief

  1. Italy set to pick eurosceptic finance minister
  2. UK foreign minister fooled by Russian pranksters
  3. Rajoy ally gets 33 years in jail for corruption
  4. Close race as polls open in Irish abortion referendum
  5. Gazprom accepts EU conditions on gas supplies
  6. Facebook tells MEPs: non-users are not profiled
  7. Commission proposes ending France deficit procedure
  8. UK households hit with Brexit income loss

Stakeholders' Highlights

  1. Counter BalanceEuropean Ombudsman requests more lending transparency from European Investment Bank
  2. Nordic Council of MinistersOECD Report: Gender Equality Boosts GDP Growth in Nordic Region
  3. Centre Maurits Coppieters“Peace and reconciliation is a process that takes decades” Dr. Anthony Soares on #Brexit and Northern Ireland
  4. Mission of China to the EUMEPs Positive on China’s New Measures of Opening Up
  5. Macedonian Human Rights MovementOld White Men are Destroying Macedonia by Romanticizing Greece
  6. Counter BalanceControversial EIB-Backed Project Under Fire at European Parliament
  7. Nordic Council of MinistersIncome Inequality Increasing in Nordic Countries
  8. European Jewish CongressEU Leaders to Cease Contact with Mahmoud Abbas Until He Apologizes for Antisemitic Comments
  9. International Partnership for Human RightsAnnual Report celebrates organization’s tenth anniversary
  10. Nordic Council of MinistersNordic Cooperation Needed on Green Exports and Funding
  11. Mission of China to the EUPremier Li Confirms China Will Continue to Open Up
  12. European Jewish CongressCalls on Brussels University to Revoke Decision to Honour Ken Loach

Stakeholders' Highlights

  1. Sustainable Energy Week 2018"Lead the Clean Energy Transition"- Register and Join Us in Brussels from 5 to 7 May
  2. EU Green Week 2018Green Cities for a Greener Future. Join the Debate in Brussels from 22 to 24 May
  3. Nordic Council of Ministers12 Recommendations for Nordic Leadership on Climate and Environment
  4. Macedonian Human Rights MovementOxford Professor Calls for an End to the Anti-Macedonian Name Negotiations
  5. ACCAPeople Who Speak-Up Should Feel Safe to Do So
  6. Mission of China to the EUProgress on China-EU Cooperation
  7. Nordic Council of MinistersWorld's Energy Ministers to Meet in Oresund in May to Discuss Green Energy
  8. ILGA EuropeParabéns! Portugal Votes to Respect the Rights of Trans and Intersex People
  9. Mission of China to the EUJobs, Energy, Steel: Government Work Report Sets China's Targets
  10. European Jewish CongressKantor Center Annual Report on Antisemitism Worldwide - The Year the Mask Came Off
  11. UNICEFCalls for the Protection of Children in the Gaza Strip
  12. Mission of China to the EUForeign Minister Wang Yi Highlights Importance of China-EU Relations