Berlin favours possible ECB capital increase

German government sources said Tuesday they would be in favour of a possible European Central Bank capital increase to shore up confidence amid an ongoing crisis in eurozone bond markets.

Berlin favours possible ECB capital increase
Photo: DPA

Berlin would “view positively” such a move, the source said after another European source close to the matter told news agency AFP that ECB governors would discuss the issue at a regular meeting on Thursday.

“I cannot rule out that (ECB President Jean-Claude) Trichet will bring this up. Germany has always said it would support the ECB,” the Berlin source said.

“This capital increase … would be for markets to see that the ECB is well capitalised if it buys more bonds.”

The ECB’s capital currently stands at almost €5.8 billion ($8 billion). Press reports said a capital increase would strengthen the ECB’s safety net as it deals with risk linked to purchases of public debt issued by weaker eurozone countries like Greece, Ireland and Portugal.

The ECB is pressing political leaders to boost the size of a fund created to preserve financial stability, two days ahead of a crucial European Union summit.

“We are calling for maximum flexibility, and I would say maximum capacity, quantitatively and qualitatively,” for the European Financial Stability Facility (EFSF), Trichet told the media in Frankfurt late on Monday.

On Thursday and Friday, EU leaders are expected to approve a permanent eurozone crisis fund that Economics Affairs Commissioner Olli Rehn said will provide a “systemic” response to the eurozone debt and deficit crisis.

Bond markets have targeted several weaker eurozone countries including Ireland and Portugal in the fallout from the Greek debt crisis in May. The ECB has bought government bonds as borrowing rates for those members soared, marking another stage in the crisis, but raising questions as to how far it could go with this tactic.

Trichet said that “crises of that amplitude call for all of us in Europe to reflect intensively on what should be done” and urged EU leaders to do more than they have offered to so far.

In particular, deadlines for action by governments running excessive public deficits should be shortened and sanctions should be applied in a way that is quasi automatic and based on clearly defined criteria.

EU politicians that are supposed to keep an eye on each others’ finances have considerable say in such matters but have in the past been reticent to approve painful sanctions on each other.

Trichet has called several times for governments to make a “quantum leap” in governance in response to the crisis and said he believed they would rise to the challenge owing to pressure being brought by emerging economies.

“The changes I see in the rest of the world over the last 20 years are in my opinion confirming that the deepening of European unity is more justified than ever,” he said.

AFP/The Local/mry

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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.