The ECB’s limited means to heal the European economy

The Frankfurt institution is expected to take new measures on Thursday to combat the anemia of inflation in the euro area. Not sure that’s enough

The question has kept the markets in suspense for days. Will the European Central Bank (ECB) take further steps to support European activity on Thursday, 10 March, following the meeting of its Governing Council? Probably. Mario Draghi, its president, has also implied January 21: the ECB could “revise its monetary policy” in case of further deterioration of the macroeconomic panorama, he said.

The least we can say is that this degradation has materialized. In February, inflation fell to -0.2% in the euro area, far from the institution’s 2% target. Industrial producer prices, on the other hand, fell by 2.9% year-on-year, a sign that powerful disinflationary pressures are at work in the monetary union. And the latest economic indicators, bad in most member countries, let even fear the most pessimistic a return to recession. “Under these conditions, even the most reluctant governors should no longer hesitate in the face of the need to act,” said Maxime Sbaihi, an economist at Bloomberg.

Three possible solutions

According to experts, the institution could make three major decisions. The first would be to increase the volume of its redemptions of public debt (the quantitative easing in English, or QE), today of 60 billion euros monthly, bringing it to 70 or 80 billion euros. The ECB could also extend the duration of this program by six months, currently scheduled to end in March 2017.

“To reinforce this decision, it could mention that it also plans to buy more risky assets, such as corporate bonds, in the future,” said Laurent Clavel, an economist at AXA IM. “This would give the markets a strong indication of their determination to act. ”

Another option is a further drop in the deposit rate from -0.3% to -0.4%, or even -0.5%. A measure that would be tantamount to increasing the tax on banks that allow short-term liquidity to sit in the coffers of the ECB instead of lending them to businesses and households. With the risk of unfairly penalizing their profitability, denounce the banks concerned.

In order to protect the latter – and especially to prevent them from deferring this tax to their customers – the ECB could, therefore, opt for a tier system. With a deposit rate penalizing especially the most surplus banks reserves.

Lastly, the Frankfurt institution could also launch new targeted long-term refinancing operations (TLTROs), long-term loans reserved for euro-zone banks, which lend themselves to the economy- additional info for payday loan consolidation. Since September 2014, many of these massive loans have already been granted to them. “The trouble is that today banks do not need additional liquidity: they do not know what to do,” says Jean-Fran├žois Robin, an economist at Natixis.

The fear of hyperinflation

Like him, many observers doubt the effectiveness of the measures that Mario Draghi could announce. It is true that several causes of low inflation, such as falling oil prices and anemic global demand, are largely beyond the scope of the ECB.

“The risk is that to repeat that it can not do anything against low prices everyone eventually is convinced of its helplessness,” warns Christophe Duval-Kieffer, specialist inflation, and Nomura bank rate.

Perhaps. “But if he really wanted to, the Frankfurt Institute could do more,” Judge Robin said. How to buy bad loans that clutter the balance sheets of Spanish and Italian banks – what really revive credit in these countries. Or inject the liquidity it creates through QE not into the banking system, but directly into the pocket of households or businesses. An extreme form of printing money in which Germany, where the memory of the hyperinflation of the 1930s remains hot, does not want to hear about it.