ECB leader Mario Draghi stood tall in his role as ECB chairman yesterday, following the script that the EU wrote, lowering interest rates to historic lows of 0.5%. But he didn't take any concrete steps to ensure that this new liquidity helps small- and medium-sized businesses as was hoped. As soon as he started speaking he made it clear that it is the EU that has to ensure that the money hits the real economy, rising Spanish stock markets started to fall slightly and the risk premium, which had dropped to 288 basis points, shot up to around 294. But the risk premium will maintain its downward trend.
Money flowing from Japan might push it farther down to between 200 and 250 basis points. Another issue is that EU actions could make the money continue to pile up in financial firms and not flow through to companies, which is what countries like Spain need. That said, the ECB's decision lowers financing costs for the Spanish treasury and mortgage rates, but also on cash deposits. These will hover just above zero percent interest.
Because you can't please everyone at once, lower rates will hurt countries like Germany, which fears the effect that will be had on insurance investments and pension funds. This is the problem with Europe's asymmetrical economic scene, which is characterized by the north and south vying for opposite interests.
Despite his discrete manner, Draghi could not contain himself yesterday and told off governments like Spain that have reduced their structural deficits by raising taxes. He asked, as he has in the past, for every country to follow through on its promises. Because he has followed through on his.
Now the European Commission and its member nations need to do their part. For Spain, lower interest rates provide some relief, and Rajoy should take advantage of them in order to complete the country's pending reforms.
