The European Central Bank said on Thursday (12 September) it will reactivate its bond-buying programme, stepping up the monetary stimulus to maintain economic growth, but its president Mario Draghi told Germany and the Netherlands the time has come to spend more in order to avoid the risk of a downturn.
The ECB’s governing council deployed almost its full artillery on Thursday in an effort to fuel the eurozone’s fledgeling growth.
The bank cut the deposit facility rate by 10 basis points to -0.50% and will restart on 1 November the asset-buying programme at a monthly pace of €20 billion.
It also improved the conditions of its loans to banks to pump more money in the real economy. And to reduce the impact of the negative rates on banks, it decided to exclude some parts of their books from the deposit rate.
Against the backdrop of the weakening economic conditions and growing risks, “an ample degree of monetary accommodation is still necessary” to reach the ECB’s inflation target of below but close to 2%, said Draghi.
But the message to the eurozone member states, in particular to those with fiscal space, was as important as the measures announced to reporters.
The monetary decisions taken during his eight-year mandate, to conclude on 1 November, were critical for coming out of the eurozone crisis, including his “whatever it takes” in July 2012, and to fuel the expansion, especially by launching the ECB’s first quantitative easing in 2016.
But as he prepares to pass the torch on to his successor, Christine Lagarde, Draghi insisted that it is “high time for the fiscal policy to take charge”.
“In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner”, he said in his opening remarks.
The Italian central banker urged Germany and the Netherlands to act now. He said the risk of recession in the eurozone’s largest economy seen by analysis is a good reason for Berlin to take “timely and effective action” on the fiscal side.
And he told The Hague that “this is a good time to activate” the €50 billion investment programme to boost the economy if the economic situation worsens.
The further cut of the deposit rates and the restart of the bond-buying programme will likely increase the criticism coming from banks and pensioners concerned about their retirement funds and their profits margins.
Draghi said he is “very concerned” about the impact of the negative rates on pension funds, insurers and related services. As in past occasions, he added that the ECB is “closely monitoring” the negative effects of its decisions.
But he insisted that had the member states invested more, the negative impact of the monetary decisions would have been smaller, their benefits would have come much faster and the need to keep them would have been smaller.
As anticipated, some members of the governing council were against relaunching the asset-buying programme, although there was a “significant majority” to avoid a vote.
The support was broader for the deposit interest cut.
But Draghi said that all the members, including the president of the Bundesbank (German central bank), unanimously agreed that fiscal policy “should be the main instrument”, versus monetary stimulus or structural reforms.
Risk of recession?
The central banker’s strong plea to the euro area members in favour of the fiscal stimulus reflected that the monetary arsenal is nearing its limits when the risk of recession is increasing.
Draghi said the probability of a recession in the eurozone as a whole is still “small” but “it has gone up”.
In this regard, the worsening economic scenario led the Frankfurt-based bank to cut its inflation forecast for the next three years to 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021.
Draghi explained that the revision did not take into account the increasingly likely disorderly Brexit, or some trade war decisions announced but yet to be implemented.
The ECB and other institutions, like the European Commission and the IMF, have warned that the combination of these two factors could push the euro to a new downturn.
On the positive side, Draghi stressed that the high level of employment and the wage increases are sustaining the expansion, together with the trillions of euros pumped into the economy.
Review of the fiscal rules
Draghi’s message to the capitals came on the eve of a discussion about reviewing the Stability and Growth Pact that EU finance ministers will have this weekend in Helsinki.
The incoming European Commission will put forward a review of the Pact, probably next year.
Some countries and the European Fiscal Board are in favour of changing the EU’s fiscal rules to allow for more investment, particularly in this low-interest rate era.
Member states, however, remain split over the idea of introducing a ‘golden rule’ in the pact to favour productive investment, a diplomatic source explained.
The fiscal rules also came up during the ECB’s governing council meeting. “The transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy,” Draghi told reporters.
The ECB’s decision was again criticized by US President Donald Trump. He wrote on his Twitter account that Frankfurt is “trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.”
Last June, Trump already gave signals that he was ready to start a currency war with the Europeans.
Draghi insisted on Thursday that the ECB decisions were pursued to fulfill the mandate. “We don’t target exchange rates”.
And he expected that the US, as the ECB does, would stick to the G20 consensus to “never pursue competitive devaluations.”
Draghi will chair his last governing council meeting on 24 October. Lagarde will not only have to steer the euro through troubling waters but also lead a strategic review of the ECB’s instruments and goals in what is seen as a ‘new normal’ of low growth, low inflation economies.
The review will include the revision of the inflation target of below but close to 2%. And it could also add innovative monetary instruments, like the possibility of central banks giving away money directly to citizens (helicopter money), Draghi suggested.
But he said that this “interesting” idea, which is not an option to be considered today, represents a “big change” that has to be thought through.
[Edited by Zoran Radosavljevic]