Draghi's Right to Keep His Foot on the Gas
Since becoming president of the European Central Bank, Mario Draghi has rarely looked as relaxed as he did in Thursday's press conference. It's not hard to see why: The euro-zone economy is gathering speed, confidence is soaring, and unemployment is tumbling. The recovery is also spreading across the region, reducing the risk that some countries may need a different kind of monetary policy from others.
With all this good news, shouldn't the ECB be moving to withdraw its unprecedented stimulus? Actually, no -- not yet. The central bank's mandate is to keep inflation just below 2 percent over the medium term. That target, together with risks in the economic outlook, fully justifies the current policy.
Some highly placed Europeans disagree. German Finance Minister Wolfgang Schaeuble recently called on the ECB to follow the example of the U.S. Federal Reserve and begin unwinding its monetary accommodation. However, as Draghi said, while European growth has been surprisingly good lately, underlying inflation remains sluggish.
True, headline inflation is hovering around the central bank's target. However, this is mostly due to energy prices. More stable "core" inflation is still well below the target. This implies that the euro zone is still recovering the ground it lost during the recession. If the economy isn't yet running at full potential, it can continue to grow at an above-trend pace without stoking inflation.
Moreover, the ECB doesn't want to repeat the mistake it made in 2011, when it prematurely raised rates twice. As Draghi said during his press conference, six years ago inflation had been above target for some time. Tightening monetary policy now, with inflation lower, would be a bigger mistake, and harder to excuse.
Finally, while the global economy has improved, the political scene still gives cause for concern. North Korea and Syria are dangerous military flashpoints. The risk of protectionism, in the U.S. and elsewhere, remains strong. While Emmanuel Macron looks set to win the second round and become France's next president, Marine Le Pen, his Eurosceptic opponent, has yet to be defeated. Bad news from any of these quarters could deal a heavy blow to investor and consumer confidence, which remains fragile. For the moment, it makes sense to keep the mood, so far as possible, on an upswing.
At some point, though, policy will need to be tightened, and the ECB did issue a reminder about that. The governing council tweaked its statement to acknowledge that the balance of risks in the outlook for euro-zone growth is shifting. Adjusting the message like that makes sense, since the central bank wants investors to be ready for the withdrawal of monetary stimulus when it happens.
There's no doubt that the euro zone would benefit from a different mix of fiscal and monetary policy. The ECB is having to act this forcefully because governments that could afford to relax fiscal policy -- Schaeuble's, most notably -- have chosen not to. But the ECB has to take fiscal policy as given. For now, keeping the monetary stimulus flowing is the best way forward.
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