All Eyes On ECB, German Recession Looms

Ibeth Rivero

German RecessionThe German economy keeps showing signs of being amid a dire situation, as industrial orders fell more than expected in August, due to lower domestic demand.

According to data provided by the German Economy Ministry Industrial orders of German-made goods fell by 0.6 percent (month-to-month) and demand for capital goods went down by 1.6 percent.

“The weakness in demand in the industry continues,” stated the Economy Ministry, adding that the industrial sector remains "subdued the time being.”

The German economy is heavily dependent on its exports, and since global trade tensions aggravate and the Brexit political crisis menaces the economic stability of Europe, the question now is how Germany, and the European Union in general, are going to face an upcoming economic recession.

German's economic situation heavily contrasts with those of the southern European countries, which are currently enjoying solid economic growth, mostly due to a booming construction and tourism sectors. However, this economic slowdown threatens with affecting the Eurozone economy in general, as Germany's economy is currently the most powerful economy in the zone.

Now all eyes are on the European Central Bank, whose attempts to stimulate the European economy, just as their attempt to keep the Eurozone's inflation at its target, have not been as successful as they expected. This reality made the ECB leadership push for a coordinated fiscal strategy in the Eurozone, an alternative that Germany itself opposes.

The recently released Eurozone Sentix Investor Confidence was at -16.8, behind its last reading at -11.1, hitting a six-year low and showing a deteriorating European Investors' confidence. This is bad news for the Central Bank, which was expecting its recent stimulus moves were going to be met with enthusiasm.

The European Central Bank's failure to manage its monetary policy successfully (it has consistently failed at keeping the Inflation level at its target) and its inability to face an economic slowdown that they considered "temporary" has caused disconformity, even among some of the Bank's former recent officials, who recently released a memorandum criticizing the bank's current monetary policy strategy, calling it "extremely accommodative."

"A decade ago, the ECB's monetary policy made a significant contribution to overcoming the severe recession and consolidating growth thereafter," explained the ECB's ex-top officials, "However, the longer the ECB stays its extremely accommodative path, the more the negative effects prevail," they added.

Among their main points against the Bank's current policy is the ECB's insistence on employing quantitative easing and keeping the interest rates at very low levels despite it's not clear if those moves contribute significantly to the Eurozone's economic growth. The document accuses the ECB of using the quantitative easing mechanism to "protect heavily indebted governments from a rise in interest rates," something that is strictly prohibited by the Maastricht Treaty, while using Targeted Longer-Term Refinancing Operations (or TLTROs) only helps to keep weak banks and companies afloat.

"The longer the ultra-low or negative interest rate policy and liquidity flooding of markets continue, the greater the potential for a setback, Should a major crisis strike, it will be of very different dimensions than those we have seen before." continues the document, adding that central bank independence is on risk.

The ECB minutes are due on October 10 at 11:30 GMT.

By 10:23 GMT the EUR/USD was at the 1.0973, losing 0.03 percent. The EUR/CHF went down by 0.09 percent, at 1.0911 while the EUR/JPY went down by 0.12 percent, at 117.23.

About the Author
Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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