Last week, the president of the European Central Bank, Mario Draghi, announced two initiatives aimed at prologing the loose monetary policy stance that the bank has adopted in recent years. Initially, the ECB had initiated a quantitative easing programme through the purchase of sovereign debt, thereby injecting cash into the eurozone economy. Simultaneously it pushed interest rates downwards − a move, whose objective is to stimulate investment and consumption spending.

The low interest rate regime was similar to that adopted by the Federal Reserve of the US and the Bank of England. Such a move did leave the desired effects, to the extent that US economy has performed very well in the last years. The Federal Reserve did also raise interest rates but then at a certain point held back from further increases.

The UK economy has also benefitted from the low interest rate policy, such that at certain times the Bank of England did seriously consider raising interest rates. Most countries in the eurozone economy have also experienced economic growth but this growth was not uniform across the whole zone. As such, interest rates did not move within the eurozone. What we had were changes in sovereign bid spreads to reflect increased or diminished risks of a particular country.

However, economic news from around the world is not as positive as it had been in previous months. China is no longer expecting the double-digit growth, which it has experienced in past years. The US economy, although remaining buoyant, has shown signs of slowing down. In the eurozone, growth in a number of countries has also slowed down. One of the major economies in the eurozone, Italy, has gone into technical recession.

There are also geopolitical factors and not only economic ones. The impact of Brexit is just one of them. Then there is the trade war between the US and China, even if they are trying to find a solution to the impasse they have got themselves into, because the trade war is hurting them both. There are also vulnerabilities is emerging economies.

The ECB on its own can only achieve certain results

With this not so optimistic scenario, the ECB had to change tack. Last year it had signalled that it was tapering off its quantitative easing programme. Last week, the message it sent out was something totally different. It launched its third so called TLTRO. TLTROs are loans that the ECB provides at cheap rates to banks in the eurozone. 

As a result, banks are able to provide better credit conditions to their customers, which in turn stimulates the real economy. This is the third injection of stimulus of this kind from the ECB. If commercial banks lend this money on to the real economy, they then would receive cash rather than having to pay interest on the loans.

The ECB also announced that it is delaying the timing of the first increase in interest rates. Interest rates on its marginal lending facility and deposit facility will remain unchanged as they have been for years, following the euro sovereign debt crisis of 2011, in an effort to boost inflation and stimulate growth. The ECB had previously said that rates would remain at these levels until the end of summer this year. Last week it said it now expects rates “to remain at their present levels at least through the end of 2019”.

This takes me to the question I posed in the title of this week’s contribution. The recession I am referring to is certainly not Malta’s. Our economy seems to be unaffected by the goings-on I have mentioned. I am rather referring to the rest of the eurozone, of which the Maltese economy forms just a miniscule part.

Is the move by the ECB to be seen as a sign of panic? Or is it to be seen as a proactive approach to prevent any further slowdown? Draghi’s management of the financial crisis showed time and time again that he will really do anything to save the euro, as he had once promised.

I therefore believe that the move of the ECB is an attempt not to let the situation precipitate and to revamp the eurozone economy. It is a proactive approach and not a reactive approach. However, the ECB on its own can only achieve certain results. It is now up to individual governments to take the necessary steps from a fiscal perspective, to follow the lead provided by the ECB.


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