13 October 2014

Could Germany Derail Draghi Policies?

The German economy has long stood out as the pillar of strength in the 18 nation union that comprises the Euro currency. With weak economic data recently coming out of Germany the EuroZone economic leaders are faced with a dilemma of how to solve the problems that plague the economy.

Questions are now being asked about the role of the European Central Bank to provide stimulus in an attempt to ward off deflation in the region. However, the challenge will be for the ECB to convince the German people to continue to finance the overall effort to boost the European economy. 

According to an article in Yahoo, Germany makes up about 28% of the European GDP. The article went on to say that Europe saw zero percent growth in the second quarter. So with the German economy showing signs of slowing down the rest of Europe may be in trouble. 

German Public Opinion Matters

In a recent article in Bloomberg, Anatoli Annenkov, senior economist at Societe Generale SA in London said that “Draghi wants the ECB to be a central bank like any other, one that can go and buy government debt. But he’s perfectly aware of Germany’s opposition, and the storm now is a clear signal that it’ll be much more difficult.” 

In an article in Business Insider it was suggested that Germany prefers fiscal austerity and balanced budgets as opposed to running up deficits like France, Italy, Spain and Greece. Many in Germany are against the ECB’s latest plan to buy Assets and as a result the ECB faces an up hill battle to convince Germany that more stimulus is needed.

Austerity is Dead

Outside of Germany structural reform of the banking system and attempts to balance budgets are no longer viable options to consider. The debt is too high and would require too much sacrifice for politicians to endorse. So should the ECB be unable to buy assets or government debt what direction do they take?

Rates for government bonds in many countries are already at record lows. So lowering interest rates is likely not going to stimulate growth. This leaves the ECB in difficult position as the only solution they see is too print more money. The fate of the European economy for the short term rests in the hands of Germany.

Author: celticgold.eu

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