Listening to Mario Draghi this past week, you would hardly think that he’s four months from retirement.
The president of the European Central Bank surprised investors when he said that a new round of easy money “will be required” if the economic situation in the euro zone doesn’t improve. That would be measured, he said, by whether inflation can be lifted to a “sustained” level in line with the ECB’s mandate of just under 2%—a target that has proved elusive.
It was not the speech of a lame-duck president. Rather, it sounded like the statement of a man eager to make sure that the policies he initiated eight years ago will be pursued under his successor. Now, Draghi is facing both the skepticism of those who doubt he can act on his intentions and the anger of those who fear he will.
The idea that the central bank is running out of ammunition to counteract a slump is one that its own officials have repeatedly tried to shoot down. In recent weeks, Draghi has pressed that point with ever more force.
He has hinted that, although the ECB’s benchmark rate has been negative (at -0.4%) since 2014, it can go lower still.
European banks are complaining that negative rates hurt their bottom line, but the central bank has been unmoved. The ECB is now suggesting that it might take undefined “mitigating measures” to cushion the blow on banks’ profits, while insisting that the industry has more to do to cut costs.
Draghi contends that a second tool—bond-buying—can be reinstituted. The central bank used it to acquire more than 2 trillion euros worth of assets before ending the program in December. “It still has considerable headroom,” Draghi said. The bulk of the purchases were government bonds, with strict limits on the proportion of any individual country’s debt that the ECB could invest in. But Draghi and other members of the ECB’s executive board clearly think that these limits have outlived their usefulness. “The limits are ours,” board member Benoît Coeuré told the Financial Times.
The ECB could also ramp up its acquisition of corporate bonds, which account for only €177 billion of its portfolio.
Draghi’s advocacy of more monetary stimulus might not play well with the most hawkish wing of European officials, in Germany and elsewhere. Especially because the ECB president is also urging euro zone governments to prepare for fiscal stimulus, if necessary. Uncertainty created by protectionism threats previously led the ECB to warn about possible risks. But now “the prolonged uncertainty by itself means that the risks have materialized,” Draghi said.
If the European Central Bank starts a new round of stimulus in the coming weeks—possibly as soon as July 25 at its next monetary policy meeting—Draghi will have tied the hands of his successor, who will take over in November.
Decisions at the ECB are made by the 25-member governing council, which includes the 19 central bank chiefs of the euro zone’s member states.
The bloc’s leaders are yet to agree on the next ECB president, but even if Draghi’s nemesis, the über-hawkish Bundesbank President Jens Weidmann, takes over, he will find it nearly impossible to reverse his dovish predecessor’s decisions.
(Original article from Barrons by Pierre Briançon)
