ECB – entirely crazy bank. Carl

Even the most audacious speculators couldn’t believe it, when Mario Draghi announced that the European Central Bank (ECB) would lower the key interest rate from 0.5% to 0.25%. Although all parties involved were very aware of the fact that the Euro still was and is in dodgy economic realms and recovery growth hadn’t kicked in significantly, nobody had been expecting this rather rash action in order to make money available cheaper to the member states in need. It should be questioned, how effective this policy will turn out to be.
Most probably, the key motivation for this measure was the increasing fear of deflationary pressures such as experienced historically by Japan. Yet, when examining the European situation at the moment, this appears to be a threat blown highly out of proportion. Whilst there actually have been slight price decreases in Greece, everywhere else in the Eurozone prices have still been rising. The only argument for reducing the base rate could be that instable states such as Italy have way undershot their inflationary target of 2.0%. However, this can mainly be retraced to a fall in the price of oil. A real deflationary threat is only present, when there is a general fall in prices of consumer goods across the board. Hence there should not be a fear of severe deflationary risks in mainly southern-European countries.
The far more likely reason for Draghi to lower the base rate is an appeal for it on the part of a few European banks in deep water. The possibility to access cheap money will help them stay liquid and thus survive. Furthermore they will be able to buy government bonds and this way provide at least temporary easement for highly indebted states. Some argue that this easement is mainly to the benefit of Italian banks, which has caused major displeasure with a handful of Euro members. Led by Jens Weidmann, president of the Deutsche Bundesbank, this group tried to prevent the ECB’s plan from being transferred into action. Yet, they were outvoted and hence the motion carried. So why were they so displeased with the ECB’s plan?
In fact it does stabilise the troubled Eurozone states at least temporarily, but there are also major costs involved. And these costs will most likely only affect the honest German small savers, whose savings will decline in value. With Angela Merkel already having to fend off the Euro-critical advances of the Alternative for Germany (AfD), who gained almost 5% in recent general elections, this could create an explosive socio-economic issue.
Picking up again the example of deflation happening in Japan, we have to stress that attempting to cure the causes of economic illness with painkillers, i.e. low base rates for easy money, isn’t a long-term solution for economic problems. It took Japanese decision makers over 20 years to accept that forbearance isn’t acquittance. In fact deflationary pressures were only created by postponing measures other than manipulating the base rate.
At some point the inevitable reforms will have to come and the longer we wait, the more severe the final pain will be. Ignoring the ugly truth was only possible at the expense of an immense river of red ink in Japan.
Mario Draghi, it is time to open your eyes and face the facts!