Currency under $ 1.20 How weak is the euro going to be?

Status: 06/18/2021 2:09 p.m.

In the USA there are signs of a turnaround in interest rates, in Europe the key interest rate will probably remain low for a long time to come. That has been burdening the euro for days. How much will the common currency still become cheaper? The prospect of rising interest rates in the US has recently weighed on the euro. The common currency fell in the past few days from rates at 1.22 to below 1.19 US dollars. Experts cited the interest rate meeting of the US Federal Reserve (Fed) as an explanation for this strong movement. After years of zero interest rate policy, the American monetary authorities had promised interest rate hikes, at least for the longer term. Accordingly, two rate hikes can be expected by 2023.

First of all, the Fed will in all probability cut back its security purchases later in the year, with which it had pushed down long-term interest rates on the bond market in recent years. The expectation of an economic recovery with rising inflation rates alone had pushed the yield on ten-year US government bonds up from around 0.5 percent to just under 1.8 percent since the summer of last year.

Long-term rates still negative

Yields on the German stock market have also risen sharply in recent months, albeit at a significantly lower level to date. The yield on ten-year Bunds is still around minus 0.2 percent. In the low, the interest rate was only around minus 0.67 percent. Despite rising inflation rates in Germany and the euro area, the European Central Bank in Frankfurt unwilling to be, to follow the central bank colleagues in Washington and to consider at least less security purchases in the near future. In May, the inflation rate in the euro zone was 2.0 percent, slightly above the central bank’s price stability target. In Germany they moved Producer prices even rose 7.2 percent in May compared to the previous year and therefore stronger than it has been for almost 13 years. The prices were driven by the sharply rising prices of so-called intermediate goods.

Bundesbank boss for the end of the bond purchases

“In the long run this will work noticeable in consumer prices The economists at Commerzbank said: “A central bank in crisis mode, which, as ECB President Christine Lagarde said in her last press conference, does not even talk about whether a reduction in bond purchases might be necessary. appears well behind the curve in comparison. “In the opinion of the experts, the monetary authorities have thus missed the entry into the exit from the zero interest rate policy.

An opinion that is also shared by the President of the Bundesbank, Jens Weidmann. Weidmann has spoken out in favor of an early end to the trillion dollar bond purchases by the European Central Bank (ECB) after the pandemic. The focus is on the purchase program called “PEPP” the monetary guardian. “When the emergency for which the PEPP was created is over, it must be ended,” Weidmann told the “Handelsblatt”. But whether Weidmann will prevail is unclear. There are thus signs for the near future that the dollar could retain or even expand its interest rate advantage.

German exporters benefit

For German vacationers who want to spend their free time outside the euro area, that would be bad news – they would have to pay more for foreign currency. The export-oriented German economy, on the other hand, is benefiting from the trend. Last year, just 36 percent of German exports went to the countries of the euro area. And even if you include EU countries with their own currencies such as Denmark, Sweden and the United Kingdom, which has since left the country, the share of exports last year was just over half.

A good sixth of exports even went directly to the USA. In fact, the impact of the dollar rate on German exports is likely to be significantly greater. Because some international currencies are directly linked to the US dollar. These include, for example, the Saudi riyal or the diram of the United Arab Emirates. Both Saudi Arabia and the Emirates are countries that traditionally buy and import many German products with the money they earn from oil exports.

Dollar weakness later in the year?

If the US dollar gains strength, German companies have two options. Either they reap additional profits with unchanged prices. Or they react with price cuts in order to gain market share – both attractive prospects for companies.

But at this point in time it seems questionable how long the euro will actually continue to decline. Because for autumn and winter, experts like those at Commerzbank are expecting inflationary dynamics to decline again in the USA. Then “the US dollar euphoria will soon be over”

Investors in high spirits Why the DAX rushes from record to record

Status: 14.06.2021 4:03 p.m.

While the economy is only slowly picking up pace after the Corona openings, the German stock market does not seem to be stopping. What are the main reasons for the price boom? From Lothar Gries, tagesschau.de The German leading index DAX rose by up to 0.7 percent in the morning and climbed to a record high of 15,802 points – the 23rd record this year. The index has risen by 15 percent since the beginning of the year. The stock exchanges are also in record-breaking mood at the European level. The Stoxx 600 index, comprising 600 values, also climbed 0.7 percent today and reached its 38th high this year with 460.51 points. The stock markets are fired from several sides. The most important driver is the expansionary monetary policy of the central banks in the USA and Europe. Since the European Central Bank (ECB) lowered the key interest rate to zero on March 10, 2016, i.e. more than five years ago, the returns on traditional savings offers from banks and savings banks have also shrunk to such an extent that even risk-averse German investors are looking for alternatives have looked around. In addition to real estate and precious metals, stocks are very popular.

More and more shareholders

In this country there were as many shareholders last year as last year in 2001, as determined by the German Stock Institute (DAI). According to this, 12.4 million people in Germany have invested in the stock market, i.e. they owned exchange-traded securities such as fund shares or stocks. Compared to 2019, that’s an increase of 2.7 million or 28 percent. The downward trend of previous years has thus been completely reversed. After the dot-com bubble burst in 2000, the number of equity investors in Germany steadily declined – until interest rates sank to virtually zero. But the ECB has not only boosted the number of shareholders and thus share investments, it is also active on the capital markets itself. In order to keep the economic effects of the corona pandemic as low as possible, the central bank is pumping many millions of euros into the market every day. To do this, it buys bonds issued by governments and companies. By the end of March 2022, she wants to spend the gigantic sum of 1.85 trillion euros, a number with twelve zeros. A considerable part of it flows into the stock market and drives prices to ever new heights.

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No end of the flood in sight

In the past few weeks, there have been repeated suspicions that the central banks in Europe and the USA will soon be able to turn the money off again because inflation is reporting back and price increases have shot far beyond the monetary authorities’ targets. But both Jerome Powell, the head of the US Federal Reserve (Fed), and ECB President Christine Lagarde initially gave the all-clear. Just today, Lagarde said in an interview with the magazine “Politico” that the time was not yet ripe for a discussion about an end to the crisis bond purchases by the central bank. “It is far too early to debate these issues,” said Lagarde. The economic recovery must be firm, solid and sustainable. Don’t take a patient’s crutches off until the muscles begin to build up sufficiently – so that the patient can move on their own two legs again.

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V-shaped economic recovery expected

In addition, investors are assuming that the pandemic-related restrictions will end soon. “The pandemic is no longer an issue at the latest with the now significantly lower number of new infections, and investors also seem to be able to come to terms more and more with the fear of inflation,” says market expert Milan Cutkovic from brokerage firm Axi. With the decline in Covid-19 restrictions, growth expectations are skyrocketing around the globe. The Organization for Economic Cooperation and Development (OECD) expects the global economy to grow by 5.7 percent this year. For Germany, the federal government expects growth of up to four percent. The prognosis from the beginning of the Corona crisis that there will be a V-effect in which the economy first collapses, but then quickly recovers, seems to be confirmed. This is rather good news for equity investors, because they hope that a growing economy will generate increasing profits and thus rising prices for listed companies.

Price turbulence ahead?

This combination of a zero interest rate policy, a glut of money from the central banks, a growing number of shareholders and the expectation of a rapid recovery in the global economy is driving share prices to ever new heights. But the air is getting thinner. Many investors are watching the Fed’s monetary policy deliberations this Wednesday. It is true that the Fed is not expected to deviate from its current course and end the boom in the financial markets. “But their projections on inflation, interest rates and the economy could cause price turbulence,” says Naeem Aslam, chief market analyst at the brokerage firm AvaTrade.

Prices rise by five percent Highest US inflation since 2008

Status: 10.06.2021 5:44 p.m.

In the USA, consumer prices have risen as sharply as they did almost 13 years ago – which is felt above all by car buyers. The European Central Bank also expects higher inflation in the euro countries. Is it just a short-term phenomenon or is inflation now making its big comeback? In the USA there is a growing fear of ever higher prices. Some are already pulling Parallels to the 1970s when President Jimmy Carter failed to get a grip on high inflation and job misery. Although the USA is still a long way from the double-digit inflation rates of that time, the price jumps are getting bigger from month to month. After inflation had risen above four percent in April, it has now climbed to 5.0 percent in May. That is the highest rate since August 2008. Experts had only expected an increase in the cost of living of 4.7 percent. “The dreaded five has become a reality,” said market observer Thomas Altmann from investment management company QC Partners.

Federal Reserve under pressure

The strong growth impressively proves that the price surge in April was not a slip-up, said LBBW analyst Dirk Chlench. “The US Federal Reserve is coming under increasing pressure to reconsider its view that the recent price hikes are only of a temporary nature.” As in April, the prices for used cars turned out to be the biggest inflation driver. They rose again strongly – and, according to the US Department of Labor, accounted for around a third of the monthly price increase.

Core inflation at its highest level since 1992

Particularly alarming is core inflation, which excludes volatile components such as energy and food. It climbed 3.8 percent in May. The last time there was such a sharp increase was in 1992. In April, the core inflation rate was 3.0 percent. The end of the corona lockdowns and the trillion dollar cash injections by the US government have been driving inflation in the US for months. Prominent economists like Larry Summers, Olivier Blanchard and Mohamed El-Erian warn against underestimating the danger. According to Blanchard, the high government spending under US President Joe Biden could overheat the economy.

Just a passing trend?

Most economists are still looking at the trend with serenity, however. In their opinion, the development is mainly based on temporary factors. The US service sector is back in normal mode in many places. Prices for air travel and hotel accommodation are picking up again and are well above the previous year’s level, says chief economist Thomas Gitzel from VP Bank. “So there are so-called base effects at work once more.” At the same time, the shortage of semiconductors is now at least indirectly affecting consumer prices. If there are no new cars due to a lack of semiconductors, customers switched to used cars. These would have become significantly more expensive. Gitzel predicts that the price level will slowly drop from a high level in the summer months. The US Federal Reserve (Fed) claims that inflation will only pick up temporarily. Because compared to the previous year, the economic downturn in the Corona year 2020 resulted in high rates of price increase. That is why the central bank has not yet seen itself under pressure.

Little movement on Wall Street

Wall Street barely reacted to the renewed surge in inflation. The Dow Jones rose by 0.6 percent, the S&P 500 even jumped to a record high. The US dollar gained against the euro. So investors do not anticipate a tightening of monetary policy in the US for the time being. In the eurozone, too, the money locks are still strongly open. The European Central Bank (ECB) is sticking to its trillion-dollar anti-corona crisis program (PEPP) and plans to expand bond purchases in the next quarter compared to the first three months of the year. In doing so, the central bank wants to avoid tightening the financing conditions for companies, states and private households.

ECB raises inflation forecast

The rising inflation hardly worries the euro watchdogs . The higher euro will dampen inflation, said ECB President Christine Lagarde. Nonetheless, the ECB raised its inflation forecast. According to the central bank, inflation should be 1.9 percent in 2021. In March, the ECB was still assuming an increase of 1.5 percent. For 2022, the monetary authorities expect an annual price increase of 1.5 percent and for the following year unchanged at 1.4 percent. According to the ECB, inflation that is too high can lead to a price spiral. Higher prices mean consumers get less goods for their money. So they demand higher wages in order to be able to maintain their standard of living. In turn, in order to pay the higher wages, companies continue to raise the prices of their products. On the other hand, permanently low prices are seen as a risk for the economy: companies and consumers could then postpone investments – in the hope that it will soon become even cheaper. In the medium term, the ECB is aiming for an annual inflation rate of just under two percent. In Germany, the inflation rate is already above this level. In May the Consumer prices compared to the same month last year by 2.5 percent , the highest value since September 2011.

Despite rising inflation Why the ECB is not raising interest rates

Status: 10.06.2021 8:28 a.m.

Inflation is increasing in many European countries. Nevertheless, the European Central Bank wants to stick to its loose monetary policy. How long can she keep this course? By Klaus-Rainer Jackisch, MR The circular saw is still running. But the little wood that is left is not enough at the front and back. The large warehouse in the North Hessian Baunatal is usually well filled. But wood has been in short supply for weeks. “There has never been anything like it,” says Zimmermann and company owner Peter Hellmuth. The specialist fears further bottlenecks in the summer. Although demand is booming, there could even be short-time working. Because in Corona times there is more handicraft, building and tinkering, but also because the USA and China are buying empty the world market, there is currently too little wood . In April prices were almost 30 percent higher than in the same month last year, and the trend is still increasing, according to the Federal Statistical Office. Also at other raw materials are skyrocketing : Iron, steel and aluminum scrap rose by more than 60 percent, pig iron costs almost a quarter more, and the prices of electronic circuits rose by around 14 percent.

Above all, energy is more expensive

But energy prices climbed the hardest. Imported electricity, which is becoming more and more important because the amount of energy generated from sun, wind and water fluctuates sharply, even rose by 200 percent. People also had to dig deeper into their wallets for electronics and food. Inflation is back. It is coming with great strides. It is currently 2.5 percent in Germany . For the autumn, the Bundesbank and many economists expect inflation rates in this country of over four percent. Such values ​​have not existed for almost three decades. The last time the prices climbed above the four percent mark in 1993. At that time, inflation was 4.5 percent, according to statisticians. The price surge is particularly noticeable in Germany: the return of VAT to the old values ​​and the massive CO2 pricing since the beginning of the year are making themselves felt. The upturn in the economy does the rest: Through successes in vaccinations and easing, the demand for goods and services of all kinds is increasing, while at the same time supply is scarce – all of this is causing prices to go up.

Hardly any compensation through higher wages

Also in Europe: There the inflation rate rose to 2.0 percent in May. In addition to Germany, people in Austria (3.0 percent), Estonia (3.1 percent) and Luxembourg (4.0 percent) in particular have to pay more. All of that hurts, because because of Corona there are rather poor results in the wage rounds and therefore hardly any compensation. This makes price increases even more noticeable. But none of this makes much impression on the European Central Bank (ECB). It is expected that the company’s own forecasts, which will be updated this week, are well above the old estimates. It is also becoming apparent that inflation will by no means abate in the second half of the year as originally expected, but rather, on the contrary, reach new highs. But the monetary authorities in Frankfurt’s Eurotower see no reason to act. For weeks now, the members of the ECB’s Executive Board have repeatedly emphasized that the economy is recovering well, but currently still needs the support of an ultra-loose monetary policy. A repayment of the controversial bond purchases or even a turnaround in interest rates is not even hinted at.

Worried look at the financial markets

Instead, the ECB continues to pump billions from its Corona aid program PEPP into the markets at great speed – currently it is around 80 billion euros per month. This is intended to offer sufficient capital on favorable terms and to keep interest rates low. “The ECB has committed itself to ensuring favorable financing conditions during this phase,” said ECB President Christine Lagarde in Paris last week. This promise will also be kept. In fact, the ECB is not that unhappy about the price surge. The self-imposed inflation target of almost two percent has not been achieved for about ten years because one crisis chases the next. If this is different this year, it could be sold as a great success in your own monetary policy – even if the pendulum swings beyond your own target. In addition, one looks at the financial markets with concern: there share prices, also and precisely because of the ultra-loose monetary policy, have reached a level that has long been decoupled from the real economy in many areas. The central bankers fear that a change in monetary policy could lead to violent reactions and shake the fragile house of cards.

Debt rose sharply

And then there are also the debts: In southern Europe in particular, they have risen again to astronomical heights due to the collapse of tourism in the wake of the coronavirus crisis: Greece, for example, currently has a gross domestic product debt of around 205 percent. This is the highest level in the euro zone and more than during the Greek crisis. Italy, too, is groaning under excessive debts and ailing banks. An increase in the interest rate would not be right. Italy’s central bank chief Ignazio Visco is therefore particularly busy when it comes to sticking to the current monetary policy: “Large and sustained increases in interest rates are not justified by the current economic outlook and will be countered,” he said at the annual meeting of the Banca d´Italia in Rome. In fact, a new debt crisis in the euro zone, triggered by rising interest rates, would be the last thing the monetary union could use now. The central bank governors from Germany and the Netherlands, for example, cannot do much against all of these arguments. They have been calling for an exit from the ultra-loose monetary policy for a long time, but they are in the minority.

Criticism of the policy of the US Federal Reserve

So there are many reasons why the majority of monetary watchdogs prefer to keep their feet still and save themselves over the summer. A change in monetary policy at the council meeting this week is not expected, not even with a hint that it might be imminent. Only the pace of bond purchases could perhaps be slowed down a bit. But that too is unsafe. How long the ECB can continue on its course, however, also depends on the world around it. In the USA, for example, where the inflation rate is now 4.5 percent and the economy because of the two trillion corona aid program of the Biden government is slowly starting to overheat , criticism of the Federal Reserve’s loose monetary policy is growing louder. Economists such as the former IMF chief economist Olivier Blanchard or the leading economic advisor of Allianz, Mohamed Aly El-Erian, fear that the corona crisis could have changed the structure of the economy. It is therefore not at all clear that inflation will recede again quickly. If the central banks act too late and then abruptly, this could lead to upheavals in the financial markets and a recession. The next few months are therefore likely to be uncomfortable for the European monetary authorities. And also for the people in the euro zone. Because one thing is clear: it will be even more expensive.

Because of the Karlsruhe ECB judgment EU initiates proceedings against Germany

As of: June 9th, 2021 2:58 p.m.

The EU Commission considers the judgment of the Federal Constitutional Court on bond purchases by the ECB to be a “dangerous precedent”. That is why she is now initiating infringement proceedings against Germany. From Klaus Hempel, ARD legal editors The Brussels Commission believes that the Federal Constitutional Court violated the primacy of EU law with its controversial ruling on the ECB’s bond purchases last year. In doing so, Germany violated the basic principles of EU law. With the initiation of the infringement proceedings, the federal government now has two months to respond to the allegations in writing.

A judgment with explosive political power

In May 2020 the The Federal Constitutional Court ruled that the multi-billion dollar bond purchase program “PSPP” of the ECB was partially unconstitutional . The European Court of Justice (ECJ) had previously ruled that at the request of the Constitutional Court the program is legally in order and there is no violation of EU law . The Karlsruhe judges did not accept this, however, and thus opposed the ECJ – for the first time ever. They called his judgment “objectively arbitrary” and “methodologically no longer justifiable”. Your main criticism of the bond purchase program: The ECB had not justified why the program was proportionate and the significant economic impact on all citizens should be justified. The ECB and, through the ruling, also the ECJ had exceeded competences. The Bundestag and the Federal Government would have to work towards ensuring that the ECB subsequently provides this reason. In June 2020 the Governing Council looked again at the PSPP program and its proportionality. A little later, the Bundestag decided in a resolution that the proportionality test carried out by the Governing Council met the requirements resulting from the judgment. In a decision from the end of April 2021, the Federal Constitutional Court finally found that the Bundestag and the Federal Government had implemented the ruling. For the Federal Constitutional Court, the case was closed. But not for the EU Commission.

EU Commission sees dangerous precedent

The Commission sees a need for further clarification. In their view, the judgment represents “a serious precedent both for the future practice of the court itself and for the constitutional courts of other Member States”. The Brussels authority fears that the German example could set a precedent. The fear: EU states such as Poland or Hungary, which the Commission accuses of violating the rule of law, could no longer follow judgments of the European Court of Justice and refer to Germany. A year ago, shortly after the verdict was announced, had Commission President Ursula von der Leyen made it clear that infringement proceedings could be initiated against Germany . Judgments by the European Court of Justice are binding on all national courts, she explains. “The last word on EU law is always spoken in Luxembourg. Nowhere else.” It is about holding the EU together as a community of values ​​and rights. The reaction of the Polish Prime Minister Mateusz Morawiecki shortly after the ruling from Karlsruhe showed that the fears in Brussels are not entirely unjustified. He spoke of one of the most important judgments in the history of the European Union. The judgment makes it clear that the individual member states determine where the competency limits lie for the EU institutions. In Poland, the national-conservative PiS government has been restructuring the judiciary for years. The ECJ has already intervened several times and found that parts of the reforms violated EU law.

Federal government now on the train

With the initiation of infringement proceedings, the federal government now has two months to take a position. If the Brussels Commission is satisfied with the answer, the procedure would be ended relatively quickly. In the most extreme case, however, the EU Commission could ultimately sue Germany before the European Court of Justice. In this case, the conflict between the ECJ and the Federal Constitutional Court would most likely escalate for good. Shortly after the Karlsruhe ruling, Luxembourg had already expressed its displeasure and officially declared that its rulings would be binding on a national court like the Federal Constitutional Court if it had appealed to the ECJ. Regardless of how the Federal Government will express itself: It cannot impose any requirements on the completely independently acting Federal Constitutional Court, let alone prescribe not to oppose judgments of the ECJ in the future. In previous rulings on Europe, Karlsruhe had always reserved a kind of “emergency brake”, the right to the “last word” in certain cases, as it were. At the moment it cannot be assumed that the Federal Constitutional Court will move away from this line of jurisdiction. The EU Commission is obviously interested in exactly that. She wants to ensure that the court grants the ECJ the final decision-making right with regard to European law issues – with the big, actual goal in mind that other constitutional courts of problem countries such as Poland will then also permanently bow to the ECJ rulings. But how it should succeed in persuading the very self-confident Federal Constitutional Court to give up its previous dogmatics, no one currently has a conclusive answer. As expected, the Constitutional Court did not comment on today’s decision by the EU Commission in Brussels.

Dispute over ECB bond purchases Get together!

As of: June 9th, 2021 6:05 p.m.

It is understandable that the EU Commission is reacting to the Karlsruhe ECB ruling with proceedings against Germany. But that won’t resolve the dispute. Only the courts themselves can do that. A comment from Frank Bräutigam, ARD legal editors If anyone at Karlsruhe’s Schlossplatz had hoped that the high waves after the Karlsruhe ECB judgment of May 2020 would fizzle out silently, they were disappointed today. The EU Commission is initiating infringement proceedings against Germany because of a ruling by the Federal Constitutional Court. ´ That has never happened before. The relationship between Karlsruhe and Luxembourg has always been somewhat tense. But this is now a unique escalation.

Do not lose sight of questions of democracy

The starting point of the Federal Constitutional Court on EU issues is absolutely correct and important. To see that the legal limits remain an important currency at the EU level. Because one must not lose sight of the individual voter, i.e. questions of democracy. Because the individual states have not given up all their competences to the EU. With its “yes, but” approach, the court has achieved a lot in several rulings since the financial crisis in 2012 at the latest. In this specific case of the ECB bond purchase, pulling the emergency brake, accusing the ECB and ECJ of arbitrary action, went too far.

The EU Commission had to react

That was not proportionate: in terms of content, but also with a view to the possible role model effect for other states such as Poland or Hungary. What happens there in terms of content within the judiciary is of course not comparable to Germany. Nevertheless, there is this bare result: The German court does not adhere to what the ECJ says. Then why should we do this? The fact that, from its point of view, the EU Commission must therefore react and initiate a procedure – which is understandable.

Dilemma for several actors at the same time

But you also have to be aware that if you think through the process started today, it will lead several actors into a real dilemma. First of all, the federal government, which now has to take a position as a first step. What is she supposed to do? Somehow signal an independent court to correct its judgment or take other action? And in the last step, the ECJ would decide on a breach of contract. Who? Yes exactly. One of the arguing actors. He would be a kind of judge in his own case. Would that lead to a good solution?

Take “cooperation relationship” at its word

Arguing over who “has the last word” is almost always devastating. In private life, in politics and also within a network of national and European courts. It is the last thing the citizens of the EU need in these times. If the “cooperation relationship” between the courts can be heard in many speeches, this must be taken literally. Mind you: the courts cooperate with each other. Not the courts with the state and the EU. They are supposed to strictly control these two. The fact that there is often still room for improvement at the ECJ on this point has expressly contributed to this conflict.

It is the courts’ turn

An example from the two companies at issue here shows that cooperation is fundamentally possible. Because the First Senate of the Federal Constitutional Court (the Second Senate acts in the ECB conflict) has shown with important rulings from 2019 that Karlsruhe and Luxembourg can achieve control of national and European fundamental rights in the interests of the citizens together. That means: the current situation can only be defused by the courts themselves. Not from the Federal Government or the EU Commission. The actors from the judiciary know each other. Well, actually. You have to pull yourself together. It is unclear what the one solution to the specific dispute should look like, but there has been no lack of creative ideas in Karlsruhe or Luxembourg for many decades.

Editorial note Comments generally reflect the opinion of the respective author and not that of the editors.

By Klaus-Rainer Jackisch, Mr It is still a bit strange for ECB President Christine Lagarde, the new setup at the press conferences, which premiered in March. For around 22 years, the President, Vice-President and ECB spokesman sat behind a long podium table to inform the public about the latest decisions after the Council meeting. However, because the central bank wants to be fresher, more modern and more oriented towards the population, the information is now available behind standing desks on stylish steps in high-gloss white.

Economic situation “not significantly changed”

Modern chic, which cannot hide the fact that the majority in the ECB Council remains true to its monetary policy: After the speed of the bond purchase program from the Corona emergency program PEPP was accelerated in March, the tense-looking ECB President tried hard today, always to emphasize again that the ultra-loose monetary policy will continue in full swing and at an accelerated pace. Because “the economic outlook remains gloomy,” said Lagarde. There are slight signs of recovery. Overall, “the economic situation in the euro area has not changed significantly.” Accordingly, as expected, key interest rates remained at the record low of zero percent. The core of the PEPP is the massive bond purchases: the central bank wants to pump 1.85 trillion euros into the markets by the end of March next year by purchasing bonds of all kinds. More than half has already been spent. If the accelerated pace of purchases remains, the fixed volume will be reached much sooner. Therefore the question arises: What comes after?

Will the interest rate turnaround come in June?

For some time now, the “hawks” in the Governing Council, that is, the representatives of a tight monetary policy, have been sniffing their chance to set the course for the beginning of the turnaround. At the current council meeting yesterday and today they still kept their feet still. But the pressure should increase by the next meeting in June at the latest. Then there is new economic data from the ECB. The “hawks” hope that the first vaccination successes in some euro countries and significantly improved economic prospects will pave the way for markets and the population to get in the mood for a normalization of monetary policy. Strong supporters are the Dutch central bank chief Klaas Knot, who wants to reduce bond purchases as early as the next quarter. His Belgian colleague Pierre Wunsch and, of course, Bundesbank President Jens Weidmann are going in a similar direction. Your convincing argument: The financial markets must slowly be adjusted to the turnaround in monetary policy. If the swing comes too abruptly, the unrest is too great, and serious upheavals could occur, especially on the stock markets, which nobody wants. The significantly increasing inflation in the euro area also offers the justification for the monetary authorities to act. In March, the inflation rate in the euro area was 1.3 percent, after it was minus 0.3 percent in December.

The stock exchanges react sensitively

The ECB President had to experience just a few weeks ago how fragile the mood on the stock markets is. Given the sharp rise in inflation rates, yields rose on the bond markets because investors expected the central banks to tighten their reins – a diabolical development from the point of view of investors on the stock market, who reacted very coldly. An extremely nervous Lagarde therefore assured after the March conference that a change in monetary policy was not imminent – and received flanking support from the entire Board of Directors, which never tired of insuring more or less the same thing. The US and UK also joined the ECB; there the central banks struck in the same vein and thus again ensured calm and rising prices on the stock markets. But now the international unity is beginning to crack: yesterday the central bank of Canada decided as the first leading central bank in the world to reduce its bond purchases. From Monday, the monetary authorities there will only buy government bonds in a volume of three billion Canadian dollars per week, they said in Ottawa. So far it has been four billion. The low key interest rate, however, remains unchanged at 0.25 percent. The reduction in Canadian bond purchases was received with great surprise in the financial markets. It is possible because the economic outlook has improved significantly in view of the major vaccination successes in the North American country and the recovery on the labor market is also making great strides.

The “hawks” are still in the minority

But the “doves” in the Governing Council – and thus the vast majority in the body – are not even thinking of following this example. Lagarde made this very clear today: “We did not discuss plans in the Governing Council to phase out the PEPP program,” said the President. “That would also be completely premature.” A clear hint to the “hawks” not to be too hasty. Because because of the messed up vaccination campaign of the EU, the economic recovery in the euro area is much lower and is dragging on like chewing gum. Compared to the major economies in the USA and China, the data and economic conditions in the euro zone are more than disappointing – especially since the third corona wave has the old continent firmly under control and there is currently no sign of improvement. So all eyes are already now on the coming ECB meeting in June. It should be decisive for the further course of action. Then it will show whether the economy is still so weak that the monetary authorities may even spice up their PEPP program a second time because the funds planned so far are insufficient – or whether the economic forecasts are so promising that the “hawks” will last can finally initiate the long-awaited turnaround in monetary policy.

By Klaus-Rainer Jackisch, MR New money to stimulate the ailing economy is generated by the European Central Bank rather silently and unspectacularly. To combat the crisis, the central bank does not buy meters high paper or tons of paint to use to print new banknotes. Their delivery vans also do not transport cash from the catacombs of the Eurotower. And there is no printing press in the cellar that rattles, runs hot and steams vigorously. No, central bank money is usually created with a few clicks of the mouse on the computer – and in times of Corona even in the home office. The ECB thus produces book money, writes it in its books and distributes it on the markets.

Almost two trillion just for PEPP

1.85 trillion euros are generated almost incidentally in this way to combat pandemics alone. For this huge sum, the ECB buys bonds on the international financial markets in its PEPP program, which was set up especially for the coronavirus pandemic: government bonds, for example, with which the euro countries raise money for their budgets. Municipal bonds, the proceeds of which municipalities use to finance a new waterworks or the renovation of their town hall. And corporate bonds, which companies use to finance the development of new e-cars, economical washing machines or unusual chocolate creations, for example. Some of these bonds have excellent credit ratings and sell like hot cakes. You shouldn’t have others in your depot. The ECB will buy them anyway if they do not fall below certain criteria. The large amount of money that flows into the cycle is supposed to keep the economy going. It enables banks to lend companies cheaply so that they can continue to exist and hopefully expand again soon. Overall, it lowers interest rates because the central bank buys almost everything and the issuers can easily get rid of their bonds: So you only have to pay low interest. And finally, it provides the entire system with sufficient liquidity so that there are no bottlenecks. Since the financial crisis, the ECB, like other central banks, has seen bond purchases as a panacea for getting the economy going again. She didn’t really succeed. But at least the economy was able to recover a little for a while and did not slide down completely.

Risks and Side Effects

The side effects of this monetary policy are visible everywhere: the stock markets are exploding as if there is no tomorrow. Because of a lack of returns, the money flows to the stock exchanges. In the real estate markets, the home is becoming a barely affordable luxury property. After all, the sheer mass of liquidity also produces inflation in the long term, so it devalues ​​the money if it is not collected again in time. The first signs are already noticeable in real life. Another phenomenon that has so far received little attention is developing more in the dark. Experts call it the “zombization” of parts of the economy – a development that causes great damage in the long term and is likely to further reduce the level of welfare. The somewhat creepy term describes companies for which the large amount of cheap money from the ECB ensures their survival, although under normal circumstances they would have been bankrupt long ago. Either because your business idea is out of date or you cannot adapt to new circumstances. Or finally, because they are simply working inefficiently. So there are companies that can no longer pay their interest from current profits and would therefore have to file for bankruptcy. But given the current conditions, they can easily get more loans to service their interest.

Thousands of “zombie” companies in Germany alone?

The Cologne Institute of the German Economy estimates that around 5000 such “seemingly dead” companies have emerged in Germany alone in the wake of the pandemic. Their processing is also prevented because the obligation to report bankruptcy is currently suspended in this country. Worldwide, the share of such “zombie” companies is now around 18 percent, estimates the Bank for International Settlements in Basel (BIS), the central bank of the central banks and, so to speak, the mother of the entire central banking world. This value is the highest ever measured. Before the crisis it was twelve percent. This is partly due to the corona crisis. But the BIS experts have calculated that around 70 percent of these companies have no chance of getting back on their feet even without the virus. Instead, they would be artificially kept alive with the cheap money. The BIS has viewed this development with great concern for years. That is why it repeatedly calls on its members to end the loose monetary policy and return to reasonable interest rates. From an economic point of view, dragging sick and unproductive companies through is fatal in the long term because it lowers the welfare of societies and thus widening the gap between rich and poor.

Innovation slowed down, dynamism paralyzed

The structural problems of the European economy, which have at least been aggravated by the ECB policy, can be seen in bare figures: The productivity of workers in Europe has stagnated for years and continued to decline during the crisis. The number of start-ups, particularly in Germany, is also falling. In the land of inventors and inventors, the volume of patent applications is also stagnating. In fact, the monetary policy of the ECB is also causing economic dynamism in the euro zone to slacken because the “seemingly dead” companies are clogging the system. Because they occupy market areas and thus make it more difficult for new, innovative companies to enter. “Zombie” companies tie up capital, expertise and skilled workers that are lacking elsewhere in order to get new developments off the ground. The OECD has been warning of these developments for years and has repeatedly made it clear that Europe in particular is falling behind in global competition. Because in order to be able to keep up with an aggressive China and the self-conscious USA, functioning, dynamic economies are needed in Europe that are characterized by high innovative strength. Otherwise, they will not be competitive in the long run. However, this is exactly what the current monetary policy prevents.

ECB fears turbulence in the financial markets

The ECB is well aware of these connections. But when it comes to choosing between plague and cholera, it is better to stick to current politics. Even the appearance of a change in monetary policy immediately triggers unrest in the financial markets, as the rise in bond yields a few weeks ago as a result of higher inflation rates showed. The ECB is not primarily concerned with the welfare of the financial markets. But severe turbulence there always has very negative consequences for the real economy – especially for the labor market. ECB boss Christine Lagarde will probably also assure this week after the council meeting that the ultra-loose monetary policy will be continued. In fact, as announced in March, the pace of bond purchases has increased significantly in recent weeks. The ECB regards this monetary policy as a blessing. But how much it will become a curse for the economy in the long term will only be able to be assessed in years.

The protection of privacy when a digital currency is introduced by the European Central Bank is a top priority for consumers and professionals. That was the result of a survey by the ECB. The monetary authorities are considering introducing the much-discussed digital version of the euro in the coming years. Data protection is right at the top of the wish lists of citizens and experts. 43 percent of around 8,200 respondents named the protection of privacy as the most important concern. This is followed by security (18 percent), the option of processing payments in the entire currency area (eleven percent), the cost factor (nine percent) and the option of offline use independently of the Internet (eight percent).

Interviewed private individuals and experts

The results of the survey were published by the ECB in Frankfurt on Wednesday. 94 percent of the respondents were private individuals, the remaining participants were experts from sectors such as banks, including payment service providers, merchants and technology companies. Almost half of the answers came from Germany, 15 percent from Italy and 11 percent from France. “A digital euro can only be successful if it meets the needs of Europeans,” said ECB Director Fabio Panetta about the results. “We will do our best to ensure that a digital euro meets the expectations of citizens highlighted in the public consultation.”

Virtual wallet for quick payments

The digital euro should be kept in a kind of virtual wallet. In the case of purchases, for example, the money will be transferred to the seller’s cash register using a simple process, for example an app or a QR code. This should be possible both online and offline, without the Internet, for example through Bluetooth or other technical solutions. E-Euros should be able to be booked on a separate account, i.e. separately from the deposits on a normal current account. In fact, this account is supposed to be held by the ECB, but managed by the commercial banks. As with cash and book money, the normal consumer will not have direct access to the ECB.

Data protection versus illegal activities

Most of the respondents in the ECB survey support requirements to avoid illegal activities. Far fewer respondents value complete anonymity. In their opinion, new, innovative services should be integrated into existing banking and payment systems. Around a quarter of those surveyed want a digital euro to make cross-border payments faster and cheaper. The digital euro should also – with restrictions – also be usable outside the euro area. The ECB survey was conducted from mid-October to mid-January. It is part of the central bank’s deliberations on introducing a digital version of the euro. The background to this is the rapid rise of other digital currencies such as Bitcoin or Ether. In contrast to such private-sector cryptocurrencies, a digital euro would be issued by the ECB. The central bank wants to decide in mid-2021 whether the project should be pursued further.

The big banks in the euro zone are increasingly struggling with weak earnings. According to the European Central Bank (ECB), the institutions’ so-called return on equity fell to just 1.53 percent in the fourth quarter of 2020. A year earlier it was 5.16 percent. This key figure shows how high the share of profit is in the equity capital employed. The ECB attributes the fact that the profitability of the banks has fallen so sharply to increased value adjustments in the balance sheets and to provisions in the wake of the corona pandemic. In addition, it is increasingly difficult for institutions to generate profits – this is a longer-term trend in the banking industry in times of persistently low and penalty interest rates.

Share of bad loans decreased

According to experts, the longer the pandemic affects economic life, the greater the risk that credit defaults will put a strain on the balance sheets of the institutes. As the supreme supervisor of the big banks in the euro zone, the ECB has asked the industry to prepare for growing risks. In fact, according to the ECB banking statistics, the institutions have made progress in reducing loans at risk of default. The rate of “bad” loans fell to 2.63 percent in the fourth quarter of 2020 – from 3.22 percent in the same period of the previous year. However, according to the statistics, 444 billion euros of such problematic loans are still slumbering on the balance sheets. The ECB currently monitors 115 institutions – including Deutsche Bank and Commerzbank. The penalty interest that they have to pay on deposits at the central bank is a burden for the institutes and increasingly also for bank customers. This currently costs the commercial banks 0.5 percent. More and more financial institutions are passing this on to account holders. According to the comparison portal Verivox, more than 100 institutes introduced penalty interest rates for their customers in the first 100 days of the year alone. “More banks are currently being added almost every day,” said Oliver Maier, Managing Director of Verivox Finanzvergleich GmbH. Nice more than 300 banks and savings banks already charge a so-called custody fee – especially for overnight money.