Why the ECB still has a big problem?

The affair around Deutsche Bank has written another chapter. Regulators in the United States and in Britain measured fines to the biggest German bank in the sum of roughly 630 million dollars for laundering dirty money from Russia. But that is definitively not the only fine the bank was facing lately.

 

At the beginning of last year’s January the bank ended the wrangle around the tax evasion payment in the sum of 95 million dollars. And mainly, right before last Christmas, it promised American offices to pay 7.2 bn. dollars for a fault it made before the big financial crisis. While the bank was supposed to pay around double this price to the American offices initially. And so there wouldn’t be enough of those fines Deutsche bank had to also reach to its safe because of the manipulations with the price of silver.

The question stands: Is the German banking number one reformed? According to the immediate reaction of the market yes. The price of its stocks was growing on Tuesday by more than 1 %. It jumped up from the September’s minimum by more than 90 %. But in comparison with the beginning of the year 2014, the stocks of Deutsche bank are still more than 40 % lower. And that shows that stocks of this bank are still pretty fickle goods.

 

Especially the giant exposition of the bank in complicated derivatives is a big unknown to the future since not even the management of the bank is able to judge its final consequences because it will depend on the development of the financial market how will these derivatives end up. Not only Deutsche Bank but for example, even some Italian bank houses will be adding worries to European central bank (ECB) and continue to be a brake for the European economy.

That’s exactly why ECB can’t even think about starting making its monetary politics dramatically stricter. Even though the development of the inflation would soon justify it to do so. According to today’s data, the year on year harmonized inflation grew in the Eurozone to 1.8 %. That is only a tiny bit from ECB’s goal of 2 %. So the risk of deflation vanished from the economy on which is the more expensive oil significantly participating. On top of that, the economy of Eurozone is turning in top gear. GDP of the Eurozone grew according to the preliminary flash estimate quarter-on-quarter by 0.5 % in the final quarter of the year 2016. Quarter-on-quarter growth in the third quarter was improved to 0.4 %. The economy of Eurozone grew at the end of the year 2016 by 1.8 % year-on-year.

Those are decent grounds for the ECB to consider when it will stop with buying of bonds. But it can’t –it probably won’t happen this year. There is actually more reasons for that not only the problematic banks. On top of that, we still have south of Eurozone that is in debt or for example the political uncertainty. And there will be more than enough elections on the old continent this and next year. Add to that the British parliament stormily discussing activating the article 50 of the Lisbon agreement which would practically be the beginning of BREXIT.

 

So yes, ECB will stay with its loose politics and the interest rates in euros won’t grow and euro will stay unattractive interest wise against the dollar.