Thursday, 10 April 2014

Letting Rome burn - 2

This is a follow up to the first instalment published in this blog on 13.03.2014 and accessible through this link:

At last week's meeting of the ECB, faced with a persistent fall in the average Euro area inflation rate now hitting 0.5% in March 2014 and drifting further away from the 2% target inflation and ever closer to a dangerously deflationary environment, the ECB decided to do.............. nothing.

Just imagine if the inflation target was overshooting at 3.5% and the ECB would do nothing.  No way!  They raised interest rates in Summer 2008 when the overshoot was much lower and when the future was pointing to illiquid financial markets  and a financial crisis which followed soon after and dragged the whole world in the great recession.

They did nothing even though the IMF issued an appeal for monetary policy in the Euro area  to be loosened much further in order to cultivate the nascent recovery and give impetus to economic growth which would act like balsam for the restructuring of  economies  of distressed Euro area countries.

The ECB decided to do nothing, but only to continue to study and monitor.  It took cover under the excuse that the March 2014 inflation reading is erratic as it is compared to March 2013 which included Easter ( this year falling in April) giving rise to  seasonal price rises included in March 2013 are not represented yet in March 2014.     This sounds like a mere excuse to continue to doodle as the inflation trend is unmistakably downward irrespective of whether the first full moon of spring falls in March or April.

Whilst ECB President Draghi seems eager through verbal intervention to explain that the ECB is seriously considering extraordinary measures,   the excessively hawkish Lens Weidmann of the Bundesbank and who sits on the governing body of the ECB, has again felt the need to express a personal view that in  spite of what statistics say and show,  the Euro area has no risk of falling into deflation or of being trapped for a long period of time in a low inflation environment, and consequently non-conventional measures should not be seriously considered yet.

Europe has two new boys on the block who seem determined to fight austerity and restructure their economy on a growth platform irrespective of what the German Finance Minister and the Bundesbank President think.   Italian Prime Minister Renzi and new French Prime Minister Valls have independently arrived at a common conclusion that they must challenge the false policy concensus that landed the eurozone into its deepest recession / depression yet.

It is high time that the Mediterranean countries form a common front to force Europe to take the unemployment problem seriously, to help rather than hinder the painful restructuring programmes that Italy and France are undertaking and that the ECB can no longer continue to base its monetary policy on what suits Germany but has to take into consideration the situation in the whole Euro area.

After all the Euro is the currency of 18 EU countries not just of Germany and after all whilst those that had imbalances on the negative side have made substantial progress to address such imbalances ( as a proof see how the bond yield differential for these countries has narrowed and how even Greece had a successful re-appearance on the capital bond markets) Germany has done nothing to address its structural surplus imbalances.

The ECB is the Central Bank of all Euro countries not just of Germany and its Frankfurt location must not signify submission of its views to those of the Bundesbank.

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