Why does the ECB feel so uneasy?


Markets are discounting an easing in European monetary policy in the forthcoming days. Yet, the mood in the ECB is far from cheerful. It feels being dragged into action by political constraints. The wave shock the elections to the EU Parliament brought about is prompting calls for swift measures invigorating the economy.

France has openly urged the central bank to cut rates and implement an expansionary policy in a desperate attempt to overcome current sluggish performance. Germany is also pressing for talking down the Euro as exports are dented by higher than warranted currency levels. The Fed prolonged low rate stance fuels further concerns on potential deflation  in the Eurozone.

Mr Draghi was betting on recovery coming to his rescue. Over the last months, he has resisted ever increasing demands to relax credit conditions. He is all too aware that bloating the financial markets with excessive liquidity inevitably leads to buiding up dangerous bubbles. For, sooner or later, interest rates are bound to increase departing from the current historically low levels. Should monetary policy suddenly stiffen, it might cause extensive damage.

Even if it feels reluctant to trigger a widespread liquidity loosening, the ECB will be forced to act. No one expects it might avoid caving in to such forceful intimidation. It will most probably table  measures for inducing banks to offer better credit access and enhanced financial facilities to SMEs and households. But it will refrain from implementing any asset buying scheme. It is also bound to cut rates, especially on deposits, thus dissuading entities from hoarding excess liquidity instead of lending it to the real economy.

Leaning too much on cheap money for kicking up growth entails the obvious risk of a financial ballooning more likely to feed asset price increases than anchoring a sustainable recovery. No wonder the ECB feels so uneasy at the prospect of implementing a policy that might backfire in future.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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