Frexit, Brexit and the Euro Crisis?: ECB, QE and Mario Draghi
You must have heard of the Nintendo video game Super Mario. Well, in the Super Mario universe, aka the Mushroom kingdom, the Italian plumber, Super Mario, with his sidekick—brother Luigi, is trying to rescue Princess Peach from Bowser. Meanwhile…
In another universe, that of the European Union, another Italian, super Mario Draghi, the president of the European Central Bank (ECB), is trying to save the European Union’s economy. On Thursday (8/09/2016) the European Central Bank’s governing council met to discuss the Eurozone economy and the possibility of new stimulus measures.
Europe is now in a bit of a trouble. There are fears relating to:
• Greece’s own bailout programme is in an impasse, since Eurozone countries might not agree to send them more money this month.
And then there is political instability:
• there is the ongoing migrant crisis
• the Italian referendum in November will decide the limits of the Senate’s power
• promises by French far-right Marine Le Pen for a Frexit referendum, if she is elected French president.
European Central Bank: The ECB is the official institution at the centre of the European System of Central Banks (ESCB) and the Eurosystem. It’s responsible for the monetary policy for the euro area. It’s located in Frankfurt am Main, Germany and its president is Mario Draghi. The main body is called the Governing Council and consists of six members of the Executive Board and 19 governors of central banks, each one of them representing euro area countries.
• The Eurosystem is the central banking system of the euro area. It includes the ECB and the national central banks of EU Member States who use the euro as their currency.
• The European System of Central Banks (ESCB) includes the ECB and the national central banks (NCBs) of all EU Member States that use or not the euro.
• Euro area: the official word for the Eurozone.
ECB Governing Council Meeting Results, 8 September
The Governing Council meets every two weeks to make decisions in relation to payment systems, financial stability, banknotes, banking and other legal issues. Every six weeks it discusses monetary policy such as deciding about the interest rates for the euro area. Monetary policy meetings are followed by a press release and a press conference.
On Thursday, the Governing Council of the ECB decided to leave the interest rates unchanged. The benchmark rate (refi rate) remains at zero, the deposit facility rate at -0.4% and the marginal lending facility rate is at 0.25%.
There are three interest rates the ECB sets every six weeks as part of its monetary policy: refinance rate, deposit facility rate and marginal lending facility.
• What is a refi rate? This is the bank’s main lending rate on its refinancing operation which gives liquidity to the banking system. Liquidity refers to assets—resources that have economic value and in the future can generate money—that can be quickly bought and sold in the market without losing their price.
• What is the deposit facility rate? When the banks deposit money overnight with the central bank they receive this interest.
• What is marginal lending facility? It is the cost at which banks can borrow overnight from the central bank for a period of one week.
Its quantitative easing (QE) programme, which consists of buying €80bn assets every month, will also continue until March 2017, or beyond if necessary, said Draghi.
This comes as a disappointment for many financial traders who were waiting for super Mario Draghi to super-charge the markets. (See this Financial Times video on Mario Draghi’s QE and super Mario). The hope of a new stimulus was reflected on the jump of the euro. It was up 0.6% against the US dollar, at $1.13 and up 0.5% against the pound, at 84.7p. After Draghi’s announcement that there will be no new stimulus measures, the stock markets fell.
The results today show optimism about the Eurozone. The purpose of these policies is to increase competition between banks to continue lending and boost government spending so that the economy recovers. And Draghi insists that these policies are working.
Press conference following the Governing Council Meeting
• At the conference, Draghi noted that the Eurozone economy will recover slowly but steadily. He expressed his worries that the Brexit uncertainty after the EU referendum has affected the European economy and will continue to have similar effects. As he said, the slow growth of the Eurozone is partly due to Brexit.
• Draghi, however, seemed to be less worried than the journalists themselves. They have mentioned the possible negative effects of monetary policies on households and private companies. He said that they have done more good and that it would have been much worse if there were no such measures in place. Both households and private companies have benefitted, he stressed.
• Draghi explained that interest rates need to remain low for the measures to be successful; this will guarantee that the interest rates of tomorrow will be high.
• The negative rates might make people hoard cash, but Draghi said there were no such signs. He showed confidence in the ECB’s measures.
• Draghi finished his press conference by confirming a journalist’s point that Germany needs higher wages.
In general, journalists found the press conference unexciting and a “snoozefest.” There were no new dramatic changes, but the remaining hope that the stimulus measures will continue having a positive effect on the Eurozone countries.