Mario Draghi and ECB haven`t saved the eurozone
Baku, May 7 (AZERTAC). What we are witnessing is a touching belief in the ability and willingness of central banks to prevent investors suffering losses.
Financial markets have a lot of faith in Mario Draghi. They rallied last summer when the president of the European Central Bank said he would do "whatever it takes" to save the euro. And they rallied on Thursday when the ECB cut interest rates to 0.5%. Bond yields fell across the eurozone, hitting record lows in France and dropping below 10% in Greece. Stock markets liked the news, too.
But did the news warrant the upbeat response? Not really. Let`s be clear, the reduction in the cost of borrowing for the eurozone was welcome. It was also signalled in advance, long overdue, and the bare minimum that the ECB could have delivered when recession is deepening quarter by quarter and Japanese-style deflation appears to be just around the corner.
Draghi hinted that the ECB might consider negative deposit rates, which would mean that banks would have to pay for the privilege of parking money at Europe`s central bank. That threat, it is hoped, will encourage banks to lend rather than hoard their cash. And he said the ECB would consult with the European Investment Bank and the European commission about the possibility of measures that could boost credit flows to small- and medium-sized companies.
By no stretch of the imagination does this amount to a rescue plan for a eurozone facing a second calendar year of declining output and with unemployment at a record 12.1% and rising. The Bank of England had its Funding for Lending Scheme in place by the middle of 2012; the ECB is still at the drawing board stage.
This is perhaps not surprising. The ECB is a conservative institution, although it has become less so under Draghi`s stewardship. Its freedom of action is constrained by Germany`s insistence that the problems of the troubled countries of the eurozone are caused by the lack of structural reform, and not insufficient demand. It was clear from Draghi`s press conference that the decision was not unanimous and it did not take a genius to surmise that Jens Weidmann, the president of the Bundesbank, was a dissenting voice.