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Are we in for an economic crisis?

If you open up any financial news outlet these days you can see that one of the headlines is that the euro area growth has considerably slowed down with projections being slashed by 1 percent. That’s a whole deal in the world of economics translating into more than 100 billion euros of productivity losses. In “normal” times, this would have been still bad but now it is potentially catastrophical.

The economic environment in which businesses operate today in the euro area is flooded with liquidity from the Asset Purchase Programme run by the Eurosystem. Think of it as a life support for companies that would otherwise not be existent. It is like a safeguard that things are still running as smoothly as possible until we have cleared the economic and political hurdles we are facing. The APP has ended last year, mostly because the signs of an economic recovery were there and also because there was a clear political pressure on the ECB to end it. But about this in a different story.

Today, following the monetary policy meeting, the ECB has signaled clearly that the probability of a downturn can be serious and it has introduced a new series of longer-term refinancing operations to help maintain the liquidity conditions in the market. My take is that this is pretty much unprecedented in Draghi’s term. It shows that the political pressure has convinced him to give up the idea that stimulus is still needed. In fact, the ECB hasn’t reached its inflation target before it withdrew stimulus and as it looks now, things could be potentially damaging.