With economic predictions worsening, ECB President Mario Draghi has called for prudent policies for countries with high public debt, such as Portugal. Draghi also recommended the opposite to countries at the higher end of the European economic spectrum.
The message has been directed at the northern European countries whose economies are stable enough to stimulate economies on the other end of the spectrum, with the goal of bettering the Eurozone as a whole.
The ECB's projections are now less optimistic than in June and in Draghi’s eyes this calls for stimulus from states that have the budget capacity. "It is time for fiscal policy to take its place," said Mario Draghi at a press conference following the meeting of the Governing Council on Thursday, 12th in Frankfurt.
The main point of discussion are the new ECB projections that point to higher than expected economic growth in June this year. "Regarding fiscal policies, the slightly expansionary stance of the Eurozone is giving some support to economic activity," the ECB president explained.
Mario Draghi further clarified that "given the weakening economic outlook and the continuing prominence of risks, governments with sufficient budget space must act effectively and timely." For countries with high public debts, such as Portugal, the ECB leader called for caution. "In countries where public debt is high, governments must adopt prudent policies that create conditions for automatic stabilizers to operate freely," that is, in the event of an economic crisis, they must be responsive.
The ECB decided to reduce the deposit rate of central money-lending banks from -0.4% to -0.5%, trying to stimulate bank lending. In addition to this cut, the ECB decided to resume the asset purchase program through a sort of quantitative easing.
Draghi also took another proposal out from his monetary policy toolbox, putting forward staggered interest rates for banks that deposit money in Frankfurt, exempting some banks, depending on the amount.
"The Board of Governors has decided to act now rather than wait," said Mario Draghi, who spoke of a "clear majority" among the members. "One of the reasons has to do with inflation expectations. That is why the Board of Governors has decided to act now, because the value is far from the ECB's mandate," said Draghi, believing that "this package is the best option.”
Comments
The EU and the eurozone are different. If the euro suffers, then even Britain outside the EU will also suffer. But the idea of lower negative interest rates, and more quantitative easing is scary. They will further fuel inflation, and see price rises, as more printed money chases fewer goods, and in particular Portuguese real estate.
Jens Weidmann, President of the Bundesbank
Francois Villeroy de Galhau, Governor of the Bank of France
Klaas Knot, President of the Dutch central bank
Ewald Nowotny, Governor of the Austrian central bank
Ardo Hansson, Governor of the Bank of Estonia
Sabine Lautenschlaeger, Member of the Executive Board
Benoit Coeure, Member of the Executive Board
The countries of the five heads of the national central banks, from Weidmann to Hansson, account for about half of the economy of the Eurozone.
They opposed the restart of QE, but there was no vote – which is common in ECB proceedings when there is a consensus. But there was no consensus. And Draghi simply imposed his agenda (and then lied to the press)
“Such disagreement over a major monetary policy measure has never been seen during Draghi’s eight-year tenure,” according to Bloomberg’s sources.
(From Wolf Street)
Need any more reasons for the UK to leave the EU?