Tuesday 17 October 2017

Germans rein in Draghi over ECB's 1% rate

Mario Draghi, President of the European Central Bank (ECB). Photo: Getty Images
Mario Draghi, President of the European Central Bank (ECB). Photo: Getty Images

Wednesday's decision by the ECB to leave eurozone interest rates unchanged at 1 per cent might charitably be described as "incomprehensible".

With the economies of the eurozone periphery countries mired in deep depression, the ECB's refusal to cut rates smacks of dogma refusing to acknowledge reality.

With virtually all of the developed country economies headed back into recession and the long-predicted Chinese slowdown now upon us, analysts were unanimous in predicting an ECB rate cut for last week's council meeting. Instead, the ECB chose to sit on its hands -- even as the Spanish bank crisis threatened to go nuclear and the Greek exit from the eurozone moved from the "merely probable" to that of "racing certainty".

One doesn't have to be a conspiracy theorist to interpret the ECB's failure to cut interest rates as a defeat for its president Mario Draghi. Ever since taking over from the abysmal Jean-Claude Trichet in November, Mr Draghi has moved might and main in his efforts to tackle the rapidly-worsening eurozone crisis.

Last November and December, in a move that almost certainly staved off a full-blown eurozone banking crisis, the ECB pumped €1 trillion of liquidity into the single currency area's banking system.

Unfortunately, no good deed goes unpunished. While Mr Draghi succeeded in pumping extra liquidity into the eurozone banking system, he only did so in the face of fierce German opposition. German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble along with Bundesbank governor Jens Weidmann and ECB council member Jorg Asmussen have since worked mightily hard to rein in Mr Draghi and reassert German control over the ECB.

The decision to leave interest rates unchanged almost certainly indicates that, after Mr Draghi's early successes, their efforts are now succeeding.

Truly those whom the gods wish to destroy they first make mad.

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