Europe presses the panic but­ton

The Pak Banker - - OPINION - Mark Gil­bert

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.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.