ECB President Mario Draghi said on Thursday (26 April) that all eurozone countries experienced “some moderation in growth or loss of momentum” in recent weeks, as the institution reassesses how to unwind its money-printing measures adopted during the financial crisis.
Speaking to reporters after the Governing Council’s meeting, Draghi said that the bulk of the discussion was about the economic situation.
Eurozone’s economic activity indicators declined in March, registering the biggest fall since 2012. The figures for April were more reassuring, however.
During the closed-door meeting, all eurozone central bankers reported that growth had slowed in their economies, Draghi explained.
“It is pretty broad across countries and sectors”, he added.
The Italian economist also admitted that this deceleration was, in some cases “sharp”, and in others “unexpected”.
Reading the situation
The discussion focused on “reading the situation” before taking new decisions on monetary policy, Draghi explained.
“First we need to understand what is happening”, he told reporters.
The Governing Council assessed whether the slowdown is temporary or permanent; if it is due to supply or demand factors; and if it marks the start of a more significant decline or merely balancing-out normalization after a prolonged period of strong growth.
The ECB’s reading is that the slow-down is mostly due to temporary factors, and partly responds to constraints in the supply side, for example in regards to the lack of labour force in sectors such as construction.
Draghi added that “some normalization was expected” and pointed out that growth levels are still above historical averages.
The ECB expects the eurozone’s growth “to remain broad-based and solid”.
The bank also remains confident that it will reach its inflation target of below but close to 2% in the medium term. But this would be conditional to the maintenance of an “ample degree of monetary accommodation”, Draghi warned. Inflation currently stands at 1.3%.
Critics of the low interest rate regime and the bond-buying programme, especially in Germany, hoped that the strong growth in recent months would accelerate the ECB’s exit from the extraordinary monetary measures adopted to stabilize the euro.
But Draghi insisted once again that, in order to return to the inflation target, the ECB’s primary mandate, it is required “prudence, patience and persistence”, signalling that the bank is not planning to alter its calendar to normalize its monetary policy.
The ECB left its key interest rates unchanged, and stuck to its message that asset purchases (current €30 billion every month) will run until October, or beyond, if necessary.
The Frankfurt-based institution also issued a warning note regarding the ongoing international trade dispute, with Draghi noting that protectionist risks are “more prominent”.
He believed that the impact of direct tariffs “doesn’t seem to be substantial” in the euro area. But the effect would increase if Europe decides to activate its own tariffs to retaliate against the US restrictions.
Draghi noted the “profound and rapid effect” of trade tensions on the confidence of businesses and exporters, and how that could affect the growth outlook.
Deepening the EMU
The eurozone’s strengthening economic situation has been a key part of the rationale behind the recent push by EU leaders to deepen the economic and monetary union.
But both the economic and political momentum behind this now risks evaporating.
Draghi stressed that the completion of the banking union, in particular with a European-wide scheme to protect savers, and the strengthening of the EMU are “very important” and “overdue”.
“The ECB welcomes any work for deepening the EMU”, he said.
But he pointed out that political decisions are “easier in some countries than in others”.
A group of eight countries are against proposals put forward by French President Emmanuel Macron to bolster the euro area, including a eurozone budget. German Chancellor Angela Merkel is backtracking from the timid support she previously gave the French president.
Draghi called for “patience”, saying that “all leaders are aware that the EMU remains fragile if progress is not achieved”.
ECB vice-president Vítor Constâncio, who reports on the Governing Council’s meetings together with Draghi, appeared before reporters for the last time before leaving the ECB on 31 May.
Draghi praised his “passion” and his advice and said that he was “a fundamental presence” in the key decisions taken over the past years.
Constâncio told reporters that he was leaving “with a sense of the work almost done”.
He confessed that “monetary policy in the next few years will not be as exciting as when I first came”. But he added that the measures adopted to fuel the economy during the crisis “are now part of the toolkit.”
“I have doubts one can go back to the simple life of monetary policy as it used to be with small balance sheets and targeting overnight rates,” he admitted, sending a veiled message to the critics in Germany.
Former Spain’s Economy Minister Luis de Guindos will take over from him in June.