As I noted in the previous take, 2019 was the year of central banks. With their policies, they've been simply "pushing on a string", and the European Central Bank is the special case of this phenomenon. To quickly recall, "Pushing on a string is a metaphor for the limits of monetary policy and the impotence of central banks." Pumping currency into the system "will not stimulate an economy if banks think it is too risky to lend and the private sector wants to save more because of economic uncertainty". This is what's been happening in Europe over the last several years and even has gained its strength in 2019. Let's see then how the ECB governors have been putting us through the mill.


Similarly as in the case of the Federal Reserve, to better understand European Central Bank's policies in 2019 we have to go back to the fourth quarter of 2018. On December 13, the ECB announced the end of its Quantitative Easing (QE) program. QE is an unconventional monetary policy in which a central bank creates digital money (the-so called currency printing) in order to purchase government and corporate bonds or other assets from the market. The goal of the program is to increase the money supply and encourage lending and investment. In effect, a value of total assets on a central bank balance sheet rises.

The ECB started to buy corporate, government, covered bonds, and asset-backed securities in March 2015 at a pace of €60 billion a month. From April 2016 the central bank increased the rate to €80 billion a month. Subsequently, they dropped the pace of purchases back to €60 billion until December 2017, when it was cut to €30 billion, and to €15 billion in September 2018.

During the program, the ECB bought €2.6 trillion ($2.95 trillion) of assets, expanding its balance sheet to more than €4.6 trillion. It is important to emphasize that although the QE program came to an end, the central bank hasn't stopped buying bonds. These assets which had matured (issuer repaying the original/principal amount of the asset), had been reinvested by purchasing new bonds to keep the balance sheet stable.

At the same time, they kept the level of interest rates on hold. It is worth to recall that the European Central Bank distinguishes three different rates:

1. Deposit facility rate which determines the amount of interest that commercial banks receive for keeping their excess reserves overnight at the central bank. The most-watched among market participants. Back in Q4 2018, it's been set at negative -0.40% which means that commercial banks actually have to pay for parking their money on the ECB's account. Since the introduction of negative interest rates in 2014, that charge amounted to €20 billion (€7.5 billion in 2018 alone) or 4% of total eurozone banking profits (with German, French and Dutch banks bearing almost 70% of penalties).

As a result of the negative deposit rate, commercial banks decreased the costs of borrowing for individuals and corporations but have also started imposing charges on corporations and household deposits. I wrote about the consequences of these policies here:

2. The interest rate on main refinancing operations (MRO), i.e., the level of interest that commercial banks must pay to the central bank for borrowing money for a period of 7 days - stands at 0.00%

3. The marginal lending rate which determines the amount of interest of a central bank overnight loan granted to commercial banks. Currently, it is 0.25%.

For the purpose of the article, I will also focus only on the deposit rate.

As you can see, the ECB tried to put their monetary policy on hold. However, the Eurozone economy was slowing as well as the central bank was also regularly cutting its GDP growth forecasts. Thus, it was only a matter of time what other tools Mario Draghi and his colleagues from the governing council will use in the following months.


Just after a couple of months, the European Central Bank proved that it won't be able to normalize (bringing back interest rates and balance sheet to "normal" levels) its monetary policy during this cycle. Nothing surprising. On March 17, 2019, despite keeping the deposit rate on hold the ECB introduced third series of cheap loans (on preferable interest rates) for commercial banks or TLTRO III (Targeted Longer-Term Refinancing Operations). These operations were due to September 2019 and suppose to end in March 2021.

Not getting into details, those loans are providing long-term funding for commercial banks on favorable borrowing conditions in order to stimulate bank lending to the real economy. The first series of TLTROs was announced on June 5, 2014, and the second series (TLTRO II) on March 10, 2016. As you can guess, the effect on the balance sheet is similar as in the case of asset purchases, it increases because the central bank creates currency.

The above chart shows the level of the ECB assets on the balance sheet (white line). TLTROs and other longer-term loans to commercial banks are showed using gray bars. So we can conclude that the Eurozone economy was not able to withstand even three months without the central bank support or the central bankers without supporting the economy?

Subsequently, on April 10, 2019, the ECB again has kept the level of its deposit rate on -0.40% level and expected not to change it till at least the end of 2019. It reiterated a similar tone on June 6 and July 25 meetings but they also said that the rates could be held on that level or lower till mid-2020. Step by step towards more easing...


...and here we go. On September 12, 2019, the European Central Bank has announced a rate cut from -0.40% to -0.50% as well as a new asset purchases program amounting to €20 billion a month, starting from November 1 for an UNLIMITED period of time. The largest economic stimulus package in three years. The ECB has also announced the so-called tiering system which exempts from negative rates part of banks’ money (excess liquidity) parked at the central bank account. It was explained in the part outlining three different rates/ The total relief for the banking system is about 1.7 billion euros, an average of just 2.5% pre-tax profits in 2020.

The decision came despite the"unprecedented revolt". Resumption of next QE was opposed by representatives from France, Germany, Netherlands, Austria, Estonia and members on the Executive Board including Sabine Lautenschlaeger (who on September 25, resigned more than two years before the end of her eight-years term) and markets chief, Benoit Coeure. Let's recall that voting at the ECB is anonymous, thus we don't know how big the "revolt" has been.

After the decision, Mario Draghi said during his bazooka's conference that "We really think that this package is adequate to re-anchor inflation expectations."
As history shows, however, the ECB QE program actually has had no material effect on inflation expectations.

The red line on each part of the top chart shows the actual inflation measure in the Eurozone (HICP) under three different ECB presidents, whereas the gray line shows a 2% inflation (target) hypothetical trend. As you can see under Draghi's term inflation substantially missed the target.

In addition, the bottom chart shows the level of assets on the ECB balance sheet (white line) as well as inflation expectations (yellow line) measured via financial instruments called swaps. For simplification, we can call it market expectations. As you can see during the QE program inflation expectations have never reached 2%. Why therefore this time would be different, as Draghi and his colleagues claim?

No wonder then, why the decision of lowering rates and restarting the QE program has immediately faced extensive criticism. Let me bring some relevant examples. German tabloid BILD called Draghi as Count Draghila in reference to Count Dracula, who sucks people's savings. As I pointed out in this article:

$0.66 trillion of household deposits in Germany are charged by negative rates. In other words, the value of these deposits sitting on the commercial banks' accounts decreases over time in nominal terms. It is not surprising, therefore, that newspapers such as ZEIT & SZ, who were previously in favor of the ECB's monetary policy have started to also criticize Draghi.

source: Bild

Furthermore, Oliver B├Ąte, chief executive of Europe’s biggest insurer Allianz in an interview with the Financial Times hit the ECB policies saying:

“The reason why we’re not doing fiscal [reforms] is because you’re making it easy for people to spend money they don’t have,”

This was the reference to the central banks' policies and historically low costs of debt (rates).

As it was not enough, a group of former senior European Central Bankers has issued a memorandum on ECB policy.

I'll just bring one important quote from this memo:

"The negative impact of the ultra-low interest environment extends from the banking system, through insurance companies and pension funds, to the entire financial sector. The re-distribution effects in favour of owners of real assets, create serious social tensions. The young generations consider themselves deprived of the opportunity to provide for their old age through safe interest-bearing investments. The search for yield boosts artificially the price of assets to a level that ultimately threatens to result in an abrupt market correction or even in a deep crisis."

I think the message is clear, the European Central Bank with its policy is a real threat to the financial sector while increasing wealth inequality by inflating financial assets prices (stocks, bonds, real estate) and substantially elevating risks of the market bubble burst which may eventually lead to both a financial crisis and a social crisis. Sounds promising.


On October 24, has been held the last ECB meeting with Mario Draghi as the president. The central bank kept its rates on hold and reiterated that it will continue the asset purchase program for as long as needed. Thus, it turned out that Mr. Draghi will be the first chief not raising rates during his eight years term. However, this is not the greatest achievement during his term. The most remembered will be the words he said on July 26, 2012,

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

Despite euro has lost 8.5% to the dollar over this time, the Euro Area still exists. Success. However, it faces many challenges. Those problems have been outlined by Tuomas Malinen, Ph.D. Chief Economist of GnS Economics in this thread:

Thus a new president has inherited a falling economy, ill banking sector, divided Governing Council, almost out of ammo bazooka, as most of the bullets have been already used and cheering Mario Draghi's words saying  'Never Give Up!'

And here is a good moment to introduce you Christine Lagarde, the new European Central Bank president who has started his term on November 1. For those unfamiliar with Ms. Lagarde, she is a French politician and lawyer (yes, a lawyer, not economist) served as Minister of the Economy, Finance and Industry (2007–2011), Minister of Agriculture and Fishing (2007) and Minister of Commerce (2005–2007) in France. She also was Chairman and Managing Director of the International Monetary Fund (IMF) during the 5 July 2011 – 12 September 2019 period.

One would wonder whether she will continue Draghi's policies after his departure. I think she gave a clear answer to that question just two days before starting her term. On October 30 during the interview for RTL radio in France, when she was asked about negative rates and their unintended consequences such as harming savers she responded that people should be “happier” to have a job than a higher saving rate. It seems like in the new ECB president's view both objectives are impossible to achieve at the same time. What do you think about this kind of response?

Her first real test, however, came on December 12. On that day the ECB governing council has not changed rates said that they will stay at this level or lower depending on the future level of inflation. In terms of QE, similarly as in the previous meetings, the central bank's statement said that it will be continued for "as long as necessary", read to infinity. In their staff macroeconomic projections, they revised down economic growth forecast for 2020 from 1.2% to 1.1% and inflation rate from 1% to 1.1% from the previous expectations in September.

The first press conference with Christine Lagarde as the president was held in a similar tone as it used to be under Draghi, which again confirmed market watchers expectations of continuing policies of her predecessor. Here is a video excerpt from the conference:

During the conference, Lagarde has also announced the first strategic review of the European Central Bank since 2003. She expects to start in January, with the goal of ending it at the end of 2020. The review will cover a wide range of topics such as tools to stimulate further economic growth and bring inflation back to 2% target, inequality or climate change. Christine Lagarde has emphasized many times that she sees climate change as a "mission-critical" priority for the ECB and it has to be part of the review.

Moreover, in one of her remarks in the last quarter of 2019, she has hinted that part of the QE program may be used to fight climate change. Yes, creating digital currency out of thin air to buy bonds for combating the climate. Don't get me wrong, I think this is a real issue but let's be honest, should it be under a competency of unelected officials?

At the end of the new ECB president introduction, to resolve any doubts with whom we are dealing please read the quote from the last interview with Lagarde from January 8, 2020:

"There have been times in Europe when savers invested in money market funds that delivered high returns, such as at the start of the 1990s. But the monetary environment of that period penalised borrowers and the situation at that time resulted in a deep economic recession. In a recession, savers tend to reduce their savings in an effort to maintain their level of consumption. In other words, a recession is bad for savings. Negative interest rates aim to keep the economy on a balanced growth path and to avoid a recession."

Two questions:

1. Is a recession a really bad thing?
2. Have you ever heard of someone saving less during times of economic uncertainty (recession)?

The chart below shows the personal saving rate in the United Staes over the last several decades. Grey areas show previous recessions.

As you can see, the saving rate during recessions, somehow, magically increases.

To strengthen the argument, you can see what happened in Europe in 2008-2009, when the European Union 28 countries' household saving rate (green line) jumped from 10.5% to 13%. That was a period of Great Financial Crisis.


It appears that the European Central Bank tries its best to create inflation as well as higher GDP growth by pushing on a string. As a consequence, in the face of an aging population, the most hit economic agents are those who are not getting into debt and buying financial assets such as savers. If one would ask me whether these policies will continue I would say, unfortunately, yes. In a recent 337 pages ECB researchers paper "A tale of two decades: the ECB's monetary policy at 20" defending negative interest rates, authors conducted some economic simulations. They concluded that even if the rates would go to -1.00% (twice as negative as it is now) the benefits for the economy would still be higher than the damage. I wonder what in that case would happen to the European Banking Sector which is already scrubbing on the bottom as well to the entire financial system. As Daniel Lacalle, Ph.D. Chief Economist at Tressis correctly stated:

"Negative rates zombify the economy and are a massive transfer of wealth from savers and productive sectors to the indebted and inefficient."

To sum up this piece I will leave you with a very important question.

Is this an exaggeration saying that massive scale asset purchases as well as negative interest rates slow down economic growth?

Thank you for reading.