ECB Facing Trouble, Germany Approaches Recession

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Germany Recession When asked about Germany's economic outlook, Stephen Scherr, the Goldman Sachs Chief Financial Officer said that Germany is on the verge of an economic slowdown.

"We are in the early days of a slowdown. I think that you know, many of us and many economists can point to particular issues, whether it's the automotive sector or the China trade issue that weigh on the German economy," he told CNBC.

His comments came as fears of a recession keep increasing, fed by disappointing economic figures and an unstable global trade situation.

The German economy shrank 0.1 percent (quarterly) in the second quarter, after growing 0.4 percent in Q1, which was perceived as an improvement of the german economic condition, as it didn't grow up on the last quarter of 2018.

Germany heavily relies on its exports, therefore is very dependent on the global demand and subsequently the global economic situation. It makes sense to attribute this situation to the increasing economic instability caused by Trump's trade wars and the political crisis associated with the Brexit.

German factory orders (which measures demand) went down in July, falling 2.7 percent. The economy ministry doesn't foresee an improving situation in the coming months, due to "international trade conflicts and modest business expectations."

Being the biggest and most powerful economy in the Eurozone, this is not good news for the Eurozone and specially for the European Central Bank, which is being heavily criticized (even by Germany itself!) for supposed monetary policy mismanagement.

The ECB has used a very controversial stimulus measure known as Quantitative Easing (or QE) in the past. The measure consists of purchasing long-term government bonds and private securities in order to further lower the yield curve, driving down the bonds interest rates, thus increasing the money supply and boosting lending and investment, besides "easing out" certain markets.

This wouldn't have been necessary if the ECB didn't keep near-to zero cash rates for a long time diminishing their room for maneuver ( making the standard Open Market Operations ineffective), and exposing the Central Bank to a riskier situation.

The future head of the European Central Bank Christine Lagarde defended the bank's decision to implement those measures, claiming that it was necessary given that the bank had to face the ongoing European Debt Crisis.

“The crisis would have been a lot worse,” explained Lagarde, adding that she agrees that the market would need monetary support for an extended period of time.

Now that the European economy is facing a possible recession, investors expect further easing and stimulus. This expectative was fed by Mario Draghi's bid to reactivate Quantitative Easing. However, this proposal is being heavily opposed by France, Germany, Austria, and other Eurozone countries, as it increases the risks of having high inflation and thwarts savings.

“I call for special caution with government bond purchases,” said Bundensbank's Jens Weidmann, who was backed by his french counterpart who claimed that Quantitative Easing is only necessary when there is a risk of deflation.

This brings an old debate about the role of central banks on the table. The traditional perspective places the Central Bank as an institution whose main role is keeping inflation at a proper level and guaranteeing monetary and financial stability, this heavily limits the Central Bank's tools to stimulate the economy.

Now Draghi's plan is on risk, and there is no way of knowing if he will be successful in implementing it until the ECB board meets on September 12th.

Sara Patterson has a Master’s Degree in political science and enjoys analyzing both current events and the international markets to get a fuller perspective of the currency market. Before turning to financial writing, she taught English writing skills to high-school age students. Sara’s work has been published on various financial and Forex blogs.