The ECB faces a challenging dilemma. In trying to reverse a price trend leading dangerously close to deflation, the bank has brought interest rates down to almost zero. It has also flooded banks with a liquidity glut aimed at fostering dwindling credit lending and engaged in quantitative easing measures, reaping meagre results up to now. Banks are pressing Draghi to enlarge the scope of the asset-buying scheme underway by including riskier uncovered securities and sovereigns. This move is likely to transform the ECB balance sheet into a dustbin laden with impaired assets.
The cheap money stance fails to feed into the real economy. Contrary to the US, where fund raising is markedly less dependent on banks, interest levels in Europe exert a far more subdued role. Getting money here mainly requires convincing your banker. A difficult task when he is pressed by mounting prudential conditions and an acute risk aversion. He is prone to channel most of his resources for refinancing purposes, thus avoiding forbearances and failures that take such a harsh toll on capital consumption, targeting enterprises with a solid solvency record. No wonder most SMEs fail to benefit from the liquidity glut.
One has the impression that Draghi is following the primary goal of safeguarding banking balance sheets, in the process fully acknowledging his chances of invigorating the real economy look rather slim in the short run. As he repeatedly states, only combined fiscal flexibility and vast reform plans can push the economy out of the current doldrums governing its shabby performance. While he is forced to act on the monetary front to prevent weak sentiment snowballing into catastrophe, it seems dubious that the ECB can get us out of trouble on its own.
*Image: TIME magazine cover.
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