ECB Statement and Press Conference

July 16, 2015

ECB President Draghi’s introductory statement focuses on monetary policy for the whole monetary union, while the press conference was preoccupied with the Greek situation.

Comments on the Statement:  In an upbeat tone, the statement says the program of asset purchases totaling EUR 60 billion per month is going smoothly and will be sustained at least through September 2016 with the implication of an extension if officials fail to see a sustained adjustment of inflation’s path consistent with the target of below, but close to 2% over the medium term.  Economic data since the June meeting were broadly within ECB expectations.  The recovery is expected to broaden.  Inflation will stay very low but positive in the months just ahead, then gradually start rising late this year and continue to incline closer to target in 2016 and 2017.  Policy is accommodative and is promoting the recovery and a return of inflation toward target.  Market-based measures of inflation expectations range from stable to recovery.  Monetary analysis confirms the need for a steady monetary policy course, completing in full all measures already taken.  The accommodative monetary policy, plus lower energy costs and a more competitive euro, limit downside risks.  While ECB policy focuses on maintaining medium-term price stability, fiscal policy and structural reforms are critically needed to address high structural unemployment and the slow growth of potential GDP.  The key sentence dealing with forward guidance reads,

If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate.

So the existing 0.05%, -0.20% and +0.30% refinancing, deposit, and marginal lending interest rates were retained and are being supplemented with the asset-buying program and other unconventional measures that enhance the transmission of the central bank’s basic monetary policy stance.

Press Conference:  Draghi said necessary conditions had been restored to resume ELA support to Greece, and by a Council decision that was not unanimous, such was increased by 900 million euros.  That’s a stingy amount, keeping a tight leash on Greece to ensure that the austerity approved last night by the parliament in Athens actually gets implemented quickly.  Draghi agreed that Greek debt relief will be “necessary” but also stressed that it’s not clear how best to get that done within the rules of the Economic and Monetary Union.  Contrary to the wishes of some politicians, the ECB assumes that Greece will remain a member of the common currency union.  He hopes that Greek capital controls can be lifted soon but said such can only be done when there’s no risk of ensuing chaos.  He wasn’t sure when Greek banks will reopen, and in any case that’s a decision for the Greek government, not the ECB. 

Editorial Comment:  First the good news.  World financial markets have for now avoided stepping off the cliff into an unknown much as that which followed the refusal to save Lehman Brothers from collapse.  Once again the can has been kicked down the road.  Greece will not be restored to a socially viable state while getting only enough aid to service debt but not enough to end its harsh depression.  A common currency area without a shared fiscal policy with transfer union properties as exist in the United States should never have been established.  It bestowed huge advantages on Germany but laid an inescapable trap for countries like Greece.  Germany’s unforgiving stand and uncompromising opposition to shared risk between debtors and creditors reveals a lack of empathy in its national character that is hard to understand and worrisome regarding prospects for continuing peace in Europe.  Centuries of history document that peaceful coexistence is not the natural law there.  The post-World War II era stands out as a real exception, and it’s absence of war should not be taken for granted.

Copyright 2015, Larry Greenberg. All rights reserved.  No secondary distribution without express permission.



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