MENU
EU Economics

EU’s looming financial crisis: Desperate ECB demands harsh penalties on eurozone countries

THE European Central Bank (ECB) has called for greater punishments on those eurozone countries that fail to implement much need monetary reforms in a bid to ward off a looming financial crisis in the currency

ECB watchdogs issued a stark warning after carrying out an analysis of individual state finances in the eurozone and stated that governments must invest in “more growth-friendly” policies in order to clear the growing debt within the European currency.The move also indicates a disagreement between the central bank and and the demands of individual states who object to the centralised reforms called for by the ECB.

The directive by the ECB also indicates that the bank is moving away from a loose monetary policy and is a strong indication that interest rates could be raised in the short term.

In the second quarter, the eurozone economy grew by 0.6 per cent, a slight increase over the first three months of the year. At the same time, the monetary union has now shown the lowest unemployment rate since 2009.

The European Central Bank ECBGetty                  The European Union’s central bank has called for greater punishments


After years of crisis policy, financial markets and governments have become accustomed to the fact that money is virtually zero, and that the ECB will intervene if it is threatened again.Efforts to clean up their own budget have long since disappeared in debt countries such as Italy. The fact that the debt ratio of around 133 per cent has recently stabilised – in an environment in which the eurozone is in the middle of the upswing and interest rates continue to be historically low – is already seen as a success in Rome.

However, every additional percentage point that Italy has to spend on debts as soon as interest rates pick up again, will push up the debt ratio in the notoriously slow-growing country, possibly shaking an already fragile system.

ECB economists warned in their report: ”In times of tense public finances and continuing low structural growth, both being the legacy of the recent crisis, it is crucial that financial policy is as growth-friendly as possible.”

Expenditure that can particularly stimulate the eurozone in the long term is, in the view of the ECB experts, above all state investment in education, health and infrastructure.These would have “proven positive long-term effects” on growth.

Overall, according to the report, these make up more than a quarter of all government expenditure in the eurozone.

Investment in schools and education and transport on the other hand were only accounting for up to one-fifth of all expenditure.

Consumption taxes – such as VAT – are less harmful than excessive taxation of labour and company taxes.Previously, the ECB had already called for the euro countries’ reform commitments to be more strictly adhered to.

The rather positive balance that the European Union Commission recently drew was contrasted by the fact that the fiscal pact had so far only partially been implemented by many states.

There are also good reasons to implement the corrective arm in countries with excessive imbalances and to bring proceedings against these countries, maybe even sanctions of up to 0.1 per cent of the gross domestic product of a country.

Head of the ECB Mario DraghiGetty             ECB President Mario Draghi


The EU’s early warning system, introduced in 2012, provides for such sanctions on paper. However, they have not yet been requested by the Brussels EU Commission.Compliance with the rules of the Stability and Growth Pact is of paramount importance, ECB experts said in the recent economic report.

They said “every rule is only as good as its implementation” – a warning that the monetary watchdogs themselves should be confronted with after the summer break.

The move comes after the ECB has been pumping – via quantitative easing – finances into the eurozone economy for more than two years, helped by reinvesting the money from maturing bond markets into the debt market.

ECB headquarters in GermanyGetty            The ECB headquarters in Frankfurt, Germany


However, analysis by Nordea shows that the ECB measures will have one main beneficiary – Germany.Germany is the biggest economy in the eurozone and receives the largest proportion of ECB bond-buying under the central bank’s “capital key” rules.

Like its eurozone counterparts, German borrowing costs have been driven to record lows as the central bank has had an oversized presence in the eurozone debt markets.

http://www.express.co.uk/finance/city/836208/European-Union-financial-crisis-ECB-eurozone-EU

Leave a Reply

Be the First to Comment!

Help put the World to rights and leave a Comment

wpDiscuz
MENU
Powered by: Wordpress
%d bloggers like this: