Draghi to lay his print on long term ECB policies prior to exiting next year

ECB Press Conference of 13 September 2018. Mario Draghi, President of the European Central Bank walks toward the conference room. © European Union 2018 – European Central Bank, some rights reserved. Photo by Dirk Claus.

Mario Draghi, the President of the European Central Bank, was criticized by major global financial media for insisting to end the easy money policy this December. The argument is that, after ECB’s Governing Council decided at the end of the prosperous 2017 to end its extraordinary monetary policy, the world has become a riskier place. In view of trade wars, a possible wild Brexit and Turkish tribulations threaten Europe, the ECB should at least have left reservations over ending its extra accommodative policy.

These commentators argue that the ECB should continue with its extraordinary measures well into next year and defer the capping of easy money practice. The truth is Draghi may have been of this opinion too, but the Germans and their satellites always insist on stringency, frugality and austerity. But let’s start from the beginning.

Lower growth

Last Thursday, ECB and its head Mario Draghi scaled down the growth prospects of the Eurozone economy. At the same time though, the Governing Council of the second largest central bank of the world, remained on course to hold back its quantitative easing policy, which was introduced at the beginning of 2016. Since then, the ECB has printed and injected €2.5 trillion in Eurozone, through debt purchases (bonds) and has also zeroed its main interest rate, aiming at generously supporting growth.

After three years of money printing though, the time came and the ECB decided to end net bond purchases at the end of this year. Thereafter, the ECB will reinvest the maturing bonds it has purchased, so as to constantly keep €2.5tn afloat in Eurozone’s capital markets.

This money bonanza at zero or very low interest rates has greatly helped the euro area overcome the consequences of the last financial meltdown and has helped it gain a sound growth pact. Understandably, it may continue doing so in the foreseeable future. So, theoretically, and more to the point, practically, this extraordinarily accommodative monetary policy goes hand in hand with growth. Still, last Thursday Draghi lowered the growth prospects of Eurozone, but didn’t leave any doubt about ending the extraordinary new money printing. For the abridged growth prospects he just blamed trade conflicts and protectionism.

Zero interest remains

However, Draghi kept ECB’s main interest rate unchanged at its present zero level for the foreseeable future. He said “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019”. He then introduced an ‘escape clause’ by saying “and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term”. This gives him a strong argument to maintain the basic interest rate at zero level, even well after the summer of 2019 and possibly after he leaves the ECB in October next year.

Now, let’s have a reckoning of facts. ECB’s key interest rate will remain at zero levels for at least the next twelve months and “and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term”. This ‘escape clause’ may empower Draghi to argue for zero interest rates well after he is to leave ECB’s helm. At the same time, the ECB will keep flowing €2.5tn of printed money. In short, all through the medium term ECB’s extraordinary monetary stimulus will remain intact, at the exception of new money printing.

Caring also for the South

In this way, Draghi makes sure ECB’s monetary policy is to remain in the medium term supportive of growth and help the over indebted member states of Eurozone to refinance their obligations, at the lowest possible interest cost. It’s the least the monetary authorities can do to help euro area remain in one piece, despite the shortsighted view of the Germans who always demand higher interest rates and less monetary accommodation.

Italy, Greece, Ireland, Spain, Cyprus and even France would find it politically very difficult, to spend more on debt refinancing and less on social protection. Their position in the Eurozone can easily be compromised, since their home public opinion is already defiant to a monetary union with Germany.

Minding for the future

In our brave new world though, 12 or a few more months is a huge period, during which anything can happen. So, practically all along the foreseeable future the ECB is to maintain its strong presence in the global financial universe, ready to intervene if needed. So, Draghi has practically made sure his extraordinary measures will still be available in the foreseeable future, but somehow he couldn’t spell it out. During his customary Press Conference after last Thursday’s Governing Council meeting Draghi stated, “The risks surrounding the euro area growth outlook can still be assessed as broadly balanced”. However, it became known that there were voices probably including Draghi himself, who wanted a more “cautious tone” for the risk prospects.

According to a Reuters report, “A handful of European Central Bank policymakers urged President Mario Draghi to strike a more cautious tone on the economy in (last) week’s policy message but were ultimately won over”. Obviously, it was Germany and her satellite member states in the Governing Council who won the day and forced Draghi to call the risk prospects “balanced”. If the ‘more cautious’ side had won and the risk outlook was not ‘balanced’, then Draghi could probably have aired a hint about a possible continuation of full extraordinary measures, including more new money printing well after January 2019.

Balanced risk outlook?

Understandably, in a balanced risk outlook the Germanic alternative for higher interest rates is strengthened. Berlin never gives an inch. So, the international commentators were right criticizing Draghi. Nevertheless, they should have understood that this time it was Berlin and not Draghi to blame for ECB’s inflexibility, despite the real deterioration of the risk prospects during the last few months.

The Teutons, regardless their immense gains from the creation and the functioning of the euro area, obstinately deny sharing costs and risks in order to keep the euro money zone going. That’s why the next ECB President has to be a southerner or French. If it is to be a German or of Germanic influence, the euro area may be short-lived.