What to expect from ECB?

Don't hold your breath for the press conference at the European Central Bank (ECB) in Frankfurt, Germany. Expect no proverbial "market-moving news" simply because there are no economic developments that would warrant a departure from an easy credit stance.The euro zone is experiencing a core rate of inflation between 0.9 percent and 1.2 percent. The unemployment rate in more than half of the monetary union is still stuck in a range of 9.4 percent (France) and 20.6 percent (Greece), with more than 115 million people — 23.4 percent of the population — at risk of poverty and social exclusion.

Apart from that, the monetary stance has to offset the fiscal policy's restrictive bias, because the euro zone is struggling to reduce its huge public debt (89.1 percent of GDP), and most member countries are far from official commitments to balance their public sector accounts.

It is also well to remember that a central bank is not supposed to restrict the money supply under conditions of excess demand for its currency.

The ECB should probably exercise a bit of pedagogy in explaining its policy markers. Anybody reading the confused European financial commentaries can see that there is a clear need for that.

The euro is a well-managed currency. Over the last twelve months, the euro's trade-weighted value increased 4.6 percent (in contrast to dollar's 5 percent decline) and served as a powerful instrument of price stability in a highly open euro area economy, where the external sector accounts for about 70 percent of GDP.

The European currency will not be negatively affected by Germany's political turmoil. The German monetary policy is in the hands of ECB, and Berlin's discretionary fiscal measures will be frozen until there is an effective governing coalition with stable parliamentary majority.

When will that happen is anybody's guess. In my view, a coalition around the Union and SPD under Merkel's leadership is a long shot. If Merkel steps down, the way might be open for some sort of Union-SPD government. Otherwise, new elections will be inevitable, although it is not clear that the outcome would produce a substantially different configuration of potential coalition partners.

Meanwhile, the euro zone investors might wish to focus on a supportive ECB policy, the monetary union's increasingly sound fiscal management, strengthening growth dynamics and a remarkable price stability.

Bloomberg Pro Terminal
Trader Velizar Mitov

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