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Thursday, March 12, 2015

Mario Draghi ECB president optimistic about future of euro zone economy

Mario Draghi, President of the European Central Bank(ECB) gave a positive optimistic outlook for the euro zone economy during a press conference in Cyprus.
The euro zone economy is receiving a stimulus from lower prices for oil. The fall in the value of the Euro also improves the situation for exporters. Finally, the ECB is introducing a policy of quantitative easing(QE) through the purchase of sovereign bonds. This should improve liquidity and stimulate the economy. The Bank will begin the bond buying program on March 9.
The ECB will purchase $66.48 billion in bonds each month until September 2016. The program could continue beyond that date if the goal of raising inflation to around the two percent level is not reached. ECB economists provided support for Draghi's optimism with predictions of 1.5 percent growth in 2015,1.9 percent in 2016 and just over 2 percent in 2017. Although prices actually fell in January and February of this year, they are expected to rise by 1.5 percent next year, and 1.8 percent in 2017. In total, the ECB plans to buy $1.2 trillion in bonds. Draghi claims that the program will result in the euro zone's fastest growth rate since 2007 and boost inflation.
There was no good news for Greece in Draghi's remarks. There was no waiver of the requirements for being eligible to participate in the bond buying program for Greece. This will make financing for the Greek government a continual struggle since it will need to issue more treasury bills that will have a high interest rate. As one article described the situation in a rather weird metaphor: In short it may be about to rain money in Europe, but Athens is holding an umbrella.However, Greece does not have enough sovereignty to throw away the umbrella. It must get permission from its creditors to do so.
In an earlier speech before the European Parliament in late February Draghi noted that unless countries gave up some of their independence and created more institutions governing the entire zone its future would be at risk. Draghi complained that the euro zone had not yet become a real monetary union:“In the medium to longer term, we need to move from a system of rules and guidelines for national economic policy making to a system of further sovereignty sharing within common institutions so as to strengthen our economic policy governance. A common rule is only as strong as the common institution that can enforce it.”
Draghi said that if Greece showed that it was willing to stick by the conditions of the bailout, the ECB would again accept Greek government bonds as collateral. Draghi left the parliament even before debate was finished to the annoyance of a number legislators. Sceptics claim that improving economic conditions may have more to do with the much lower cost of oil and the lower value of the euro that has stimulated exports:Bundesbank President Jens Weidmann, said the euro-zone economy would enjoy an uplift anyway after oil prices fell by half, the euro tumbled, and stimulus in recent months such as interest-rate cuts take effect.


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