From left to right. Vítor Constâncio, Vice-President of ECB, Mario Draghi, President of ECB, Christine Graeff, Director General Communications ECB. Draghi explained the Governing Council’s latest monetary policy decisions and answered questions from journalists at a press conference on 19 January 2017 in Frankfurt am Main. (ECB Audiovisual Services. Some rights reserved).
Mario Draghi, the President of the European Central Bank, is under mounting pressures both at home and abroad. From the other side of the Atlantic US President Donald Trump is overtly targeting a much cheaper dollar compared to euro, while at his inaugural speech he clearly praised trade protectionism by saying, “Protection will lead to great prosperity and strength”. At the same time, the powerful German minister for Finance, Wolfgang Schauble, demands that the ECB drastically reverses its extra relaxed monetary policy and make real interest rates positive again. In this way, his compatriots will once more start gaining from their bank deposits and thus happily vote for Angela Merkel yet another time this September.
In a peculiar way, both the Americans and the Germans seem to be annoyed by the current strength of the dollar and the weakness of the euro. During the last moths the exchange rate of the two moneys has been falling favoring the American currency and currently the rate rests in the region of 1.05. To be reminded, that in the past, the single European currency was exchanged for 130 or even against 165 American cents. Trump however, brandishes more threats against Europe. It was not only his loud protectionist rhetoric at the inaugural speech in Washington D.C. last Friday.
More threats
The new American President had even more menacing statements against Europe. He said that the US has spent trillions to “defended other nation’s borders while refusing to defend our own”. After WWII, the US with her leading role in NATO and her huge nuclear arsenal was supposed to guarantee the European borders against the aggressiveness of the ex USSR. After the fall of the communist bloc this arrangement didn’t change. Actually, after the Ukrainian civil war, the US has greatly strengthened its military presence in Europe and has deployed a new missile system in Poland and Romania near the Russian borders. Moscow considers it as national threat and has replied accordingly.
Now, this is probably going to change. Trump’s rapprochement with Russia and his idea for the US to stop protecting Europe’s borders pose a double problem to Eurozone. For one thing, the Europeans must greatly increase their defense spending at a time when economic stagnation still upsets the euro area. Not to say anything about the fact that in the aftermath of the financial crisis, all the major European banks are haunted by hundreds of billions of non-performing loans (NPL).
European weaknesses
It’s exactly the stagnant economy and the NPL that prompted the ECB in March 2014 to introduce a super relaxed monetary policy. Today, the ECB continues to inject €60 to €80 billion a month into the euro area financial system. In this way the central bank supports the banking system to recapitalize and help economic growth and indirectly suppresses the exchange rate of the euro, in order to further strengthen the economic recovery through making the exports cheaper and the imports dearer.
In such a context Draghi has to face a double challenge. On the one hand, it’s the peculiar concurrency of Trump and Schauble against the weak euro. For different reasons the two demand that the euro appreciates again with the dollar. On the other, the new American administration’s trade and geostrategic threats against Europe are directed to destabilize the political horizon in the entire Old Continent. Putin’s covert financial support to Eurosceptic political parties like Marine le Pen’s Front National now appear concerted with Trump’s rhetoric against the ‘Germanic’ European Union, together aiming at weakening if not unravelling the club. It may be premature to discuss such prospects and many analysts point to the problems Trump has to wed electoral rhetoric with real time policy, but the willingness to challenge Europe seems to be there, emanating from the White House and the Kremlin.
Calming down Germany
Nevertheless, the President of ECB last Thursday had answers to both directions. Regarding Schaudle’s demands for restrictive policies and higher interest rates, he reacted decisively. Last week, in the customary Press conference after the Governing Council session, when answering a journalist’s question he said it plainly: “The recovery of all of the Eurozone is in the interests of everybody, including Germany. The German savers have benefited, not only as savers but also as borrowers, as entrepreneurs, as workers – like all the other citizens of the eurozone. So we have to be patient; as recovery will firm up, real rates will go up”.
In short, Draghi told Berlin that monetary policies cannot and will not be tailor made for Germany, but are supposed to serve all Eurozone. As a matter of fact, there are euro area member states like Italy, Greece, Spain, Portugal and France which still need supportive and expansionist monetary measures, to help their financial system redress and their economy to recover. Telling Schauble though to ‘be patient’ needs courage and stamina. Not to forget, that Draghi and his monetary policy have been referred and judged in the German courts. Finally, the case was cleared by the European Court. But let’s return to the present worries of ECB’s President.
Educating Trump
Last Friday, Trump at his inauguration ceremony thought he was still addressing an electoral rally and brandished economic war against Europe. Draghi had a lot to say on that. The ECB boss reminded everybody that, “The exchange rates for us are not a target but they are important for price stability and growth”. In this way, he points out to Trump that the exchange rate is a crucial variable and has to be treated accordingly. Understandably, Trump thinks that the dollar is now overvalued against the euro, thus hampering American exports and favoring imports from Europe. In Trumptalk this means the Europeans are stealing American jobs using improper means and this has to be stopped or as he puts it, to stop the “American carnage”.
Draghi continued his discourse to educate Trump as follows “There is a very strong international consensus in the G20 and the G7 to refrain from competitive devaluations. So there is a whole protocol in the various statements by the G20 and the G7 that basically states how countries should behave with respect to exchange rates”. In this way, the author of euro area’s monetary policy rings the bell to the new American administration. If they choose to break out from their country’s international obligations the other side can do the same. Understandably, the same can be said for a possible Washington’s unilateral decisions on the equally important field of trade.
In conclusion, Europe is reminding Trump that his win in the American presidential race and his settling in at the White House don’t give him the right to forsake his country’s international commitments. The present status quo in international relations is a very complex and rather unstable edifice. Any Unilateral action to change its basics from the largest, richest and more powerful country of the world would bring about dangerous insecurity and will certainly drive the globe to uncharted parts of the universe.
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