Europe’s Decisive Day


Junior member
15 1
In December 2014, the Euro zone consumer prices fell on a year-to-year basis for the first time in its short history. A closer look at the EU’s CPI index reveals that the union’s deflation is no longer a fear but a concrete reality. In December 2011, the CPI had gained 2.75%, before continuously losing momentum at 2.22% in 2012, then 0.86% in 2013, before recording the first negative figure of -0.21% last month. A number, which will surely have a major impact on the European Central Bank’s next meeting on January 22nd, 2015 especially that the figure is now crucially below its pre-announced inflation target of 2%.

With deflation now on the table, many member states are getting deeper in trouble as they are burdened by huge amounts of public and private debt. Those countries can no longer rely on pre-calculated income to repay their debt, and hence, it’s now only a matter of time before defaults are on the horizon once again if not instantly tackled. On January 22nd, the ECB is expected to take a different path, as president Mario Draghi vowed to expand the ECB’s balance sheet toward 3 trillion Euros up from its current three-year low at 2.2 trillion Euros.

The ECB, which had lately cut its lending rate to 0.5% and its deposit rate to -0.2%, is now planning to implement a Quantitative Easing (QE) strategy, whereby it would buy billions of Euros worth of government debt. The problem with Quantitative Easing, is that Germany, the leader of the pack, have always criticized its efficiency and even publicly ridiculed it. Furthermore, a core characteristic of Quantitative Easing is selectability, i.e. buying only high-quality debt such as AAA rated sovereign bonds. Therefore, even if the ECB chooses a more lenient approach and goes for lower rated bonds, a BBB for instance, it would still exclude heavily exposed countries such as Greece. Let alone that three days later, on January 25th, Greeks will be heading to the polls to elect a new government.

A second alternative for the ECB would be to ignore the selection criteria altogether and allocate its purchasing program relative to each state’s stake in the central bank. However, this path could raise a lot of objections not only from within the ECB itself, but also from politicians and activists all over Europe. In October 2014, a group of German politicians and activists had already resorted to the European Court of Justice against the ECB’s 2012 sovereign bond buying program. The court, which is expected to rule on the case three days from now, on January 14, could shatter all ECB’s Quantitative Easing plans and send everything back to square one, not just for Europe, but for the global economy as well.

However, in such case, the ECB may opt for a final solution, whereby it would simply ask national central banks to do the buying instead. A solution, which would definitely click with the German methodology that have always promoted the idea that each national central bank should be confined the risk of its own country, whereas the ECB returns to its initial supervisory role.

It’s definitely a tough month for Europe, with its decisive day coming on January 22nd!

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Junior member
15 1
@jason.. totally agree! especially that financial markets have already discounted those decisions so any disappointment could have dramatic effects..
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