In a move, which has angered many politicians and financial pundits in Germany, the European Central Bank’s president Mario Draghi has announced that the ECB is going to pump €60bn per month into the financial markets until, at least, September 2016, in what market pundits have dubbed the “Shock and Awe” treatment.And, on the face of things, he has certainly managed to do just that, “shock and awe” the financial markets, in an effort to try and rout the deflation of the eurozone.
The eurozone has been hit hard, what with the slowdown in worldwide demand, the slowdown in China, and the Russian sanctions imposed on EU (as well as other countries outside the EU) food exporters, which has impacted on thousands of jobs across the industry – from Scottish salmon farmers, to Greek olive oil and Spanish fruits exporters: to meat, poultry fruit and dairy products exporters: via way of Russia’s reply to the sanctions imposed on Russia, from the US and the EU.
The effects of these (food exporting) sanctions to Russia are being felt far and wide, with many EU countries quietly calling for an end to these crippling sanctions and Europe is now entering into a deflation cycle, as a result of all of these combinations taking their toll.
And. That is quite apart from what could happen with Greece, now that a snap election is on the radar.
However, whatever the divisive opinions of our government leaders and financial experts are, in dealing with the current eurozone crisis – all are agreed on one thing…that there is no doubt that the eurozone project is in serious trouble.
John Cridland, director general of the CBI, welcomed Draghi’s move: “At the moment, flagging eurozone economies are dragging on UK and world growth. Quantitative easing will give the Eurozone recovery a much-needed boost, which should also have a positive economic effect in the UK”.
Christine Lagarde, managing director of the IMF, which cut its growth forecasts for Germany, France and Italy last week, said QE should “help lower borrowing costs across the euro area, raise inflation expectations and reduce the risk of a protracted period of low inflation”.
Sony Kapoor, of the Think Tank Re-define, called on eurozone governments to respond by relaxing austerity policies and increasing public spending, to create demand and restore economic growth.
“Today the ECB has finally arrived as a truly ‘European’ Central Bank. It has acted against political opposition to deliver what is by most measures an ambitious programme of quantitative easing,” he said. The ECB has finally, if belatedly, done its part. Now it’s time for the eurozone to relax the fiscal constraint.
While the UK’s Chancellor of the Exchequer, had this to say: “The fact that the ECB had to take this drastic action shows the European economy is much weaker than the UK economy and it’s also a warning to Britain of the risks that lie ahead if we were to abandon our long term economic plan.”
A slowdown in the eurozone, Britain’s major export market, is one of the key risks to UK economic recovery.
However, the German government have taken a completely different view and are totally against Draghi’s quantative easing announcement, announced at Davos yesterday.
Angela Merkel, the German chancellor, speaking at the World Economic Forum in Davos, said: “It does not surprise me that there is a contentious debate within the ECB. The world is already well supplied with liquidity. Regardless of what the ECB does, it should not obscure the fact that the real growth impulses must come from conditions set by the politicians.”
The ECB quantative easing, ‘Shock and Awe’ move, has, however, definitely incurred the wrath of Berlin. Many Germans view this move as giving some free-spending EU countries, the likes of Greece, for example, a free bailout loan.
A headline on the website of the newspaper Bild after the announcement read: “ECB takes billions of debt off ailing euro states: What happens to my money now?”
However, Draghi has, in his defence, supported Angela Merkel’s opinion that national governments have to make plans and implement them; to help kick start growth.
He has stated that QE alone would not be enough to patch up the eurozone economy, by saying this: “What monetary policy can do is to create the basis for growth, but for growth to pick up you need investment, for investment you need confidence, and for confidence you need structural reforms.”
And, France’s Hollande has had this to say, on the topic: “ECB easing doesn’t remove need for reform.”
Forexlive.com reports that Germany has now filed a legal objection to the ECB move in the German Constitutional Court.
However, the UK’s Daily Telegraph reports that, “An opinion passed down by the European Court of Justice may mean that the “final hurdle” to a euro area quantitative easing scheme has been cleared.”
Whatever, the outcome of this ECB ‘Shock and Awe’ move and any court proceedings against it…the fact of the matter is…reforms should have been implemented, and acted upon, years ago. Had that been done…I reckon we would not be in this mess now?
The eurozone project needs major, structural reforms, if it is to survive into the nearest future. For, this has been accident of tsunami-like, biblical proportions, which has merely waiting in the wings to happen. And, the show is far from over. It is going to get messy out there.
In other forex news headlines today…Reuters reports that Oanda has entered the bidding race for Alpari UK’s, website which went into administration, after having been brought down by last week’s removal of Switzerland’s removal of its cap on the Swiss franc and the ensuing, forex market turmoil left wallowing around in its wake.
by Victor Romain