Europe Is Letting the ECB's Gift Slip Away

Updated on
  • Draghi said to see low chance of economic reforms before 2018
  • Europe faces swath of national votes as populists gain ground

Mario Draghi might be wondering if the golden ticket he gave governments is about to be squandered.

The European Central Bank president has argued for years that his ultra-loose monetary policies have given governments space to enact the reforms essential for boosting the euro area’s growth potential. Now he’s signaling that time is running out as negative interest rates, free bank funding and a 1.7 trillion-euro ($1.9 trillion) bond-buying program start to push up consumer prices.

Draghi said this month that inflation will be back to the ECB’s goal of just under 2 percent by early 2019, effectively signaling a timeframe for governments to take advantage of the economic fillip from monetary stimulus. Yet with national votes looming in countries covering three-quarters of the economy, and polls showing support rising for reform-resistant populist parties, there’s little prospect of significant progress until that window of opportunity has started to close.

“The reality is, unfortunately, that politicians can only push through unpopular reforms if there really is pressure and they are in crisis mode,” said Michael Heise, chief economist at Allianz SE in Munich. “It is a bit of wishful thinking to think that this help from the ECB will be answered with reforms. That is exactly what we do not see, and it’s not to be expected in the political process.”

The ECB’s Governing Council concludes a two-day policy meeting on Thursday, when Draghi will hold a press conference at which he’s likely to repeat his warnings not to place the sole burden of reviving growth and inflation on central banks. He has intensified that message in recent months, saying other policy areas must contribute “much more decisively” and structural reforms are “essential.” Since July he has said they must be “substantially stepped up.”

Credit data point to a deceleration of the region’s economic recovery. A composite index of bank lending compiled by Bloomberg Intelligence has fallen for a third consecutive quarter and is now at the lowest level since the end of 2014.

At the annual meetings of the International Monetary Fund in Washington this month, Draghi called for a three-pronged approach of monetary, fiscal and structural policies -- with a “particular focus” on the last of those -- to be “pursued with determination.” In a media briefing in the U.S. capital, he went further, saying that “governments know that time is limited, these accommodating monetary conditions will not be forever.”

Those comments were echoed by Governing Council member Ilmars Rimsevics, who said “We are buying time for politicians to do structural reforms and unfortunately this time, it may be running out.”

Deaf Ears

The signs are that the ECB president is becoming resigned to his words falling on deaf ears for a while to come. He told officials at the IMF meetings that he doesn’t expect euro-area governments to heed his pleas before 2018, according to a person in the room who asked not to be identified because the meeting was private. An ECB spokesman declined to comment.

Four of the euro area’s five largest economies are scheduled to go to the polls by the end of next year. Italy’s referendum this December on constitutional changes could bring down Prime Minister Matteo Renzi if he loses. A presidential ballot in France next year, and parliamentary elections in the Netherlands and Germany, offer scope for euro-skeptic populist parties to register increased support.

Draghi’s pleas have ranged from general calls to boost productivity and cut red tape to European-level suggestions such as a joint fiscal capacity. This year, the ECB created a task force on potential economic reforms, and while Draghi has said the central bank has no intention of making specific proposals to national governments, the analysis could become more relevant when the time comes to consider withdrawing monetary stimulus.

“One can really feel a loss of patience,” said Maxime Sbaihi, an economist at Bloomberg Intelligence. “The ECB can’t dictate to governments what they need to do, and vice-versa. They can of course advise them but that’s about it. The recent creation of an in-house task force to consider economic reforms is as far as it goes. Public appeal and expertise advice are the only tools the ECB has to push governments to act.”