Draghi Prods Euro Area to Ready Ground for Economic BoostJeff Black
Mario Draghi is about to give the euro-area economy a jump-start. He’s asking the currency bloc’s leaders to make sure they’re in gear.
Over the next six weeks, the ECB will be rolling out measures that could begin to restore the central bank’s balance sheet to the levels it had at the height of the sovereign debt crisis. At a Sept. 12-13 meeting of finance ministers in Milan, he told them his efforts would have limited impact if they didn’t make their economies ready to absorb it.
With the TLTRO liquidity scheme that starts on Sept. 18, an asset-purchase plan targeted at easing access to credit next month, and the potentially cathartic end to a year-long bank health review coming before November, Draghi’s ECB is increasing the intensity of its economic support. Political leaders are beginning to follow suit.
“The new measures together with the TLTROs will have a sizable impact on our balance sheet, which is expected to move toward the size it used to have at the beginning of 2012,” Draghi told reporters on Sept. 12. “No matter what the monetary and even fiscal stimulus has been decided, we won’t see much growth coming from these measures only if there are no serious structural reforms.”
Draghi arrived in Milan with political will for those reforms at risk. While there are some stirrings of fiscal stimulus that could boost growth, such as a 300 billion-euro ($389 billion) plan floated by incoming EU Commission President Jean-Claude Juncker, governments are dragging their feet on measures to make the economy more efficient. Last week France and Italy were both scolded by the EU for their lack of progress.
“We need to accelerate the implementation of our ambitious structural reform agenda,” said Jeroen Dijsselbloem, the Dutch finance minister who leads meetings of euro-area finance chiefs. “We cannot solely rely on monetary policy, but need the appropriate policy mix.”
In response, finance ministers said they will “take stock” of the need to reduce the tax burden on labor when discussing member states’ draft budgets in November.
In the meantime, markets are waiting to see the size of the first allotment of the four-year TLTRO program, as well as further details of the asset purchase scheme announced on Sept.4. Draghi said then that the ECB would buy asset-backed securities and covered bonds.
Still, the ECB president may yet fall short of his aim of returning the balance sheet to 2012 levels, which would imply extra stimulus of up to 1 trillion euros, according to a survey of economists by Bloomberg News. While survey respondents said the net injection will be closer to 635 billion euros, other observers are more optimistic about the level of pent-up demand for credit.
“I would not be surprised if we see between 700 billion euros and 900 billion euros,” in the TLTRO operations, said Jose Manuel Gonzalez-Paramo, a former ECB Executive Board member who now serves on the board of Banco Bilbao Vizcaya Argentaria SA. “The banks are quite happy to request this money, and they are willing to lend.”
While Draghi says the plan to purchase asset-backed securities will further help unlock lending to the real economy and boost inflation, he’s facing stiff opposition from the region’s largest economy, Germany. Bundesbank President Jens Weidmann, a critic of previous ECB policy, said the plan transfers private-sector risks to the taxpayer.
“ABS purchases through the Eurosystem are problematic if they are linked to the transfer of major risks concentrated on particular issuers or countries,” Weidmann said Sept. 13 at a press conference with German Finance Minister Wolfgang Schaeuble. “Then the taxpayer would at the end of the day bear the risk associated with these securities.”
Draghi is also receiving mixed support for his ABS purchase scheme, beyond agreement on the principle. ECB policy makers have made clear the venture would be more successful if it could buy up not just the senior tranches of securitized debt, but also higher-risk “mezzanine” slices, as long as they had state guarantees. There’s little willingness yet to expand those guarantees in line with the ECB program.
“Do I support additional guarantees from the government on these products? The answer would be no,” the Netherlands’ Dijsselbloem said.
By themselves, the slew of recent ECB activity will have a positive impact, BBVA’s Gonzalez-Paramo said, including the publication of the results of the Comprehensive Assessment that precede the ECB’s assumption of bank oversight duties in November. As European banks have raised significant amounts of capital this year, there shouldn’t be big surprises, he said.
“The exercise is very likely to produce the goals that motivated the assessment in the first place, which is to provide credibility, confidence, transparency and comparable data,” he said.
The ECB is already going it alone. While the central bank pumps fresh cash into the markets and prepares asset purchases, it is building a new, parallel institution to watch over the financial system, the Single Supervisory Mechanism. Elke Koenig, the head of Germany’s Bafin regulator, said a series of preparatory meetings with the banks over the next few weeks will be “intense.”
“It feels like when you are building a house and want to move in in six weeks’ time,” Koenig, who sits on the SSM’s Supervisory Board, said in an interview in Milan. “In that period of time you need to make sure there’s a good team working on it, and naturally blood pressure is going up a bit. But in the end you make it.”