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 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.