Today the Podcast Podcast Economy

Recovery of the European economy: what to expect from the ECB?

The eyes of the markets are turned towards Frankfurt. The European Central Bank (ECB) is holding a highly anticipated meeting in the afternoon. Six weeks after hinting that a panoply of stimulus packages was being prepared, the ECB could make it happen. This will most certainly be the last wand of Mario Draghi before his departure late October. One of the expected ingredients of this cocktail of economic vitamins is a further drop in rates.

The key rates are already at their historic low for more than three years. But, the ECB can still take them down a notch. The preferred path is a lower deposit rate for banks that leave their excess liquidity in the coffers of the ECB. A rate that is already negative, that is, these institutions pay a kind of " tax ". To understand it, it's a little like if your savings account, the bank took some of your savings, instead of paying you interest to reward you for having entrusted your money.

Currently this rate is at least 0.4%, and it could drop to minus 0.6%, possibly in several stages. This would mean that banks should pay more to let their reserves sleep. The objective of the ECB: to encourage them not to play squirrels too much and to lend more to households and businesses to encourage consumption and investment and therefore growth.

Quantitative easing , tiering : but what is it?

But at the same time, the ECB could take a step that would counterbalance this rate cut. Tiering is envisaged. The word is obscure but the principle quite simple: the establishment of a system of tranches to which apply different rates as is already in force in Switzerland and Japan. Consequence: the reference rate would only apply to a fraction of the deposits and the bill would be less burdensome for the banks. An invoice estimated in 2018 to 7.5 billion euros but unequally distributed. Mainly hand-in-hand, French and German banks, according to Frederik Ducrozet, strategist at Pictet.

Giant loans

The ECB could also inject money more or less directly into the economy. The Frankfurt institution is preparing to launch a third series of giant loans for banks at very advantageous rates. The condition is that they in turn lend to households or businesses. Compared to previous plans, the rules are slightly hardened; the rates will vary from -0.3% to + 0.1% depending on the amount of credits redistributed by each bank. In previous editions in 2014 and 2016, banks and especially the most fragile in Italy had jumped at the opportunity.

In addition, the idea of quantitative easing 2 is gaining ground . This quantitative easing, in French, has already been deployed between 2015 and the end of 2018. This anti-crisis weapon consists of private or public debt buybacks through a writing game. This allows the ECB to artificially inject money into the economy since, in order to schematize, the holder of an incentive to sell trades an obligation for immediately usable money. The result, in theory, if the logic goes to the end, it must lead to more purchases in the real economy and rising prices. One of the ECB's objectives is to maintain an inflation level of 2%, which it considers necessary for the good health of the economy. But inflation is still down.

Internal disagreements

The governors of the ECB still have to agree. Dissent emerged this summer. The " doves ", traditionally in favor of a strong support of the economy and led by Mario Draghi, the president of the ECB, aka " Super Mario " are favorable to the resumption of quantitative easing . But hawks, including the German and Dutch representatives, are reluctant.

The governor of the Banque de France, François Villeroy de Galhau, remains very measured. It is for him " a question to discuss " but not necessarily in the immediate future.

On the analysts' side, economists at BNP Paribas believe that the Frankfurt institution would be well advised to keep a few tricks in its hat for later. Especially since the ECB and Mario Draghi, any " super " that he may be, have no control over many of the factors that affect the economy: the US-led trade war and the uncertainties around Brexit .

If the ECB takes all of these measures today, Mario Draghi will end his crisis-ridden mandate, as he began: by putting on the table: " all that will be needed ", according to the expression he had used during the euro crisis of 2012. But, it would leave a little room for maneuver Christine Lagarde who will succeed in November. That said, the Frenchwoman whose resignation from the IMF presidency is taking effect today, is also in favor of an accommodating monetary policy provided she remains attentive to any undesirable effects.

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