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As the euro crisis drags on and no end seems to be in sight, two players have emerged that will be key to solving the deficit problems of many ailing states like Greece, Spain and Portugal: Germany and the European Central Bank (ECB).

Germany is the strongest economy in the eurozone and the one of the few that has not yet been sucked into recession by the economic downturn on the continent. The Germans, led by Angela Merkel, have the economic firepower to withstand market forces that could possibly drag weak eurozone countries into recession.

On the other hand the ECB also has major monetary firepower and a chequebook that could be used to purchase bonds from those countries at risk of defaulting. The problem is that EU treaties do not allow the ECB to finance member nations’ debts directly.

One of the major problems facing the eurozone is that these two major players are at odds as to how best to come to terms with the crisis. Merkel is preaching tough austerity to countries like Greece and Spain.

Her mantra is that nations can only become more competitive if they slash massive budget deficits and cut government and spending. But that solution will only help in the longer term. ECB President Mario Draghi advocates another measure: Having the ECB buy up an unlimited number of government bonds of these ailing countries to make sure they won’t have to pay the massive interest rates the market currently demands for financing their debt.

This policy is called Outright Monetary Purchases (OMT), but the Germans are not at all happy with the idea of the ECB stepping in and buying national debt bonds. Berlin believes the ECB is overstepping its boundaries by directly financing national debts and most of all that the policy could lead to inflation, something the Germans are very afraid of.

Draghi embarked on a charm offensive on Wednesday meeting with members of German parliament to explain his policies to them. While the Merkel government has grudgingly accepted the OMT program, many German policymakers, especially members of Merkel’s governing coalition, still reject the measure. 

The meeting happened behind closed doors and Draghi told the parliamentarians that he had come not just to tell them about the strategy, but also to listen to their concerns and their ideas. He dispelled fears the ECB is overstepping its boundaries.

“OMTs will not lead to disguised financing of governments. We have specifically designed our interventions to avoid this. They will take place solely on secondary markets, where bonds that have already been issued are traded. If interventions take place, they will involve buying government debt from investors, not from governments.”

Later, the ECB’s president tackled Germany’s biggest concern, whether OMT’s can lead to inflation, something Germans fear since the country effectively went bankrupt in the 1930s, leading to widespread poverty and, many believe, the rise of the Hitler regime.

“OMTs will not lead to inflation,” said Draghi. “We have designed our operations so that their effect on monetary conditions will be neutral. For every euro we inject, we will withdraw a euro. In our assessment, the greater risk to price stability is currently falling prices in some euro area countries. In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it.” 

The OMTs will come and are a part of the European Central Bank’s strategy to come to terms with the Eurocrisis. A handful of German politicians is not going to stop this practice. But if more bailout money is needed for countries like Spain, then the German parliament would have a say and approve the additional funds. So Draghi’s charm offensive to Berlin was both necessary and important. Draghi met the skeptical German parliamentarians head on. Whether he is able to change their minds is unclear.

Germany is in the run-up to a national election and euroskepticism works among some voters. But the visit certainly did its part to calm the public and take the initiative away from many of the most vocal critics of the European bailout measures in Germany’s parliament.

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