Even the Germans Can’t Deny Economic Reality in Europe

(Bloomberg Opinion) -- So, they have been paying attention to the fragile state of Europe's economy after all. According to a Bloomberg News report, the European Central Bank will on Thursday acknowledge that its own downgrades to the euro area's growth and inflation forecasts are big enough to justify a change in monetary policy.

This is the green light for a new round of super-cheap bank funding in the region, known as targeted long-term financing operations (or TLTROs for short) — although their actual implementation isn't likely until the ECB's next meeting in April. Both the euro and European sovereign bond yields fell in response. This was particularly evident in weaker countries such as Italy, whose banks will probably be at the front of the queue in the take-up of the new TLTROs.

It seems that the worryingly large size of the downward revisions has been sufficient to bring the hawks on the governing council, such as Bundesbank head Jens Weidmann, into line with the rest of the governing council (including ECB chief Mario Draghi). There had been some pushback on looser policy from both the German and French members of the bank's governing council. Weidmann said just a week ago that “there would have to be a monetary policy reason” for the return of TLTROs. From what my news colleagues are reporting, he appears to have seen the light.

That doesn't mean there won't be a lively debate between the euro zone countries about the size, length of maturity and technical nature of another round of discounted central bank loans into the banking sector. This is unlikely to be totally settled at Thursday's meeting of the council.

But at least the ECB is stirring into action after a brief period where it's been hard to read its intentions, even if it rather hopefully expects the region's gross domestic product to return to trend growth by the end of this year. That only looks possible if Draghi gets his way now in adding more stimulus. The Germans will need yet more convincing.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.