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The source of last resort

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Foto di Caterina Righini

Lorenzo Cinelli

God bless Mario Draghi. That was probably the thought of many of us a couple of weeks ago when the ECB chairman finally launched the Quantitative Easing in the Euro area.

A lot has been said and discussed about the new ECB program to push the Eurozone towards normal inflation levels, however two aspects should be particularly highlighted. First, the ECB has reinforced its credibility. The markets did not appreciate the long wait, since a little bit of scepticism that they would not do whatever it takes arose in the last months of 2014. This, combined with the decision to launch a €60bn per month program, against the €50bn expected, strengthened the ECB ability to work on expectations. Second, the argument about the risk share has been cancelled. As Draghi stated, even though national central banks will bear 80% of the risk, they have enough capital buffer to sustain any potential loss. The problem is therefore irrelevant.

Despite the scepticism arisen by many economists and politicians, we can all agree that it will certainly give more stability to the financial markets and push the inflation to a level closer to the 2% target, avoiding the depreciation spiral. Hence, the Eurozone should benefit from the lower interest on debt and the depreciation of the Euro.

Nonetheless the QE represents the last chance to save the shared currency system.

Back in the summer 2012, when the turbulence reached the highest peak, Draghi worked on expectations to wipe out the doubts on the potential exit of any country from the Euro. A couple of days ago, after the weak results of the Euro area of the last quarters, the ECB officially declared that it would concretely implement a quantitative easing plan starting from March 2015. Yet, if this all-in move doesn’t work, there will be no other possibilities to save the Euro.

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One big problem is the absence of concrete structural changes. We have heard the story of reforms very often in the last three years. Many politicians have succeeded in the Mediterranean economies promising every time that it would have been the moment of change. However little has been done so far and this is reflected in the weak GDP growth. Even though countries like Greece and Portugal are currently growing at rates higher than 1%, still the overall Euro area struggled to reach a 0.8% in 2014. The same story applies to the European Community, where a bureaucratic apparatus reacts slowly and inefficiently.

 Economists and politicians, especially in Germany and Netherland, severely criticised the QE as a source of distraction for some countries from the right path. It might be true, but look it from a different perspective. The higher stability given by a depreciated Euro and the normal level of inflation creates a better environment to conduct these reforms. Moreover the program, whose length should be at least two years, will help countries to keep low interest rates on their debt for a longer time, extending the interval of manoeuvre.

Another source of problem is the future of the European community. The victory of the Syriza party, the Catalonian demand for independence and the raise of extremist parties all over Europe raise many questions. The adoption of the austerity measures, combined with the increasing gap between North and South, has spread a sense of estrangement in all the European countries.  While it once was a legend, today the spectrum of the Euro exit seems more real than ever. The question is how Europe will change: a sort of federal system in which each state contributes to a unique economy, or a fragmented union of individual states?

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In an interview (link) conducted one year ago, Davide Serra, CEO of the hedge fund Algebris, stated that monetary policy is like oxygen: it gives you time to survive but, if you are ill, you should nurse your disease. From now on, it is time for Europe, and not ECB, to seriously do whatever it takes. Politicians who pointed the finger against the lack of a monetary policy sustaining the growth have now no excuses. Otherwise, the fairy tale of Euro will definitely end.


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