Europe Presses the Panic Button
Financial markets don't seem too sure whether European Central Bank President Mario Draghi is omnipotent or whether he's impotent. Thursday's smorgasbord of monetary policy measures -- further cuts in borrowing costs, an expansion of the region's bond-buying program, new cut-price loans for banks -- suggest he has the power to persuade his fellow policymakers to act, but the economy he oversees remains stubbornly resistant to his prescriptions.
The ECB sees "weaker than expected growth momentum than at the beginning of this year," Draghi said. Given that the year is only 10 weeks old, that's worrying.
Draghi successfully surpassed expectations by boosting the ECB's monthly balance sheet expansion to 80 billion euros ($89 billion) from 60 billion euros, adding corporate bonds to the range of assets the central bank will buy, and by making four-year loans available so that banks can channel more money into the real economy. Add to these measures forecasts for slower growth and inflation and a comment that interest rates probably won't fall further, and Thursday's policy splurge smacks of desperation.
The ECB toolbox looks increasingly bare; both the stock market and the euro seesawed between euphoria at the extent of the measures and dismay that Draghi saw the need to use all his firepower.
On inflation and whether the ECB can meet its 2 percent target, Draghi wants to have it both ways. The ECB chief denied the euro zone is sliding into deflation even as he acknowledged that the bloc is likely to experience months of falling consumer prices:
No, we are not in deflation. But the macro projections show that inflation will indeed be negative for several months this year, but by year-end it will go up again basically because of our monetary policy measures. The time that it's taking to get back to this objective is now longer. That doesn’t mean that we have deflation.
The unavoidable truth is that the ECB is failing to resuscitate demand, and a sustained period of falling prices remains a real risk. Annual consumer prices fell 0.2 percent in February; even core inflation excluding food and energy prices rose by a paltry 0.7 percent, suggesting the malaise isn't just because oil prices are so low.
Draghi's retort to the challenge that he's failing to meet his mandate is to ask how dismal the outlook might have been had the bank not introduced quantitative easing, which is not much of a counter argument:
We have plenty of data from growth to the easing of financing conditions to what happened to the credit flows in the euro area since we started taking these measures. Suppose we had not acted at all? What would be the counterfactual? All this was transmitted into a growth recovery which is not spectacular, but it's there, it's gradual, and it's been continuing now for several months.
Draghi introduced a new set of long-term loans for "further incentivizing bank lending to the real economy," with a clever tweak: If banks exceed a set benchmark for lending, they get a sweetie in the form of borrowing rates even further below zero. But much of the question-and-answer session at Thursday's press conference focused on the harm being wreaked upon bank profitability by negative interest rates. Here, Draghi dodged the question. "The aggregate profitability for the banking system has not been hindered by negative rates," he said. That might be true, but it ignores the specifics that there are many euro zone banks whose profitability is being killed, thereby destroying their ability to foster economic growth by lending to businesses and households.
What Draghi can't admit is that no matter how willing he is to do "whatever it takes" to defend the euro and the euro economy, he needs government help. He made his usual plea for politicians to make the most of the loose monetary environment he's created by implementing "effective structural policies" with "actions to raise productivity" with "swift implementation of structural reforms" and the provision of "adequate public infrastructure."
But after Thursday's moves, the euro zone is even closer to the point at which there'll be nothing more Draghi or the ECB can do for the economy. Without fiscal measures from those countries that can afford to nudge public spending higher and taxes down, Draghi is effectively firing blanks and throwing good QE money after bad.
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