A chapter of eurozone history will come to a close Thursday (13 December), with the European Central Bank widely expected to withdraw a key element of support for the economy while reassuring observers fearful of the growing risks.
The past three years have seen the Frankfurt institution ward off the threat of catastrophic deflation — a crippling downward spiral of prices and activity — by buying €2.6 trillion of government and corporate debt.
Policymakers say the programme has boosted growth, helped create millions of jobs and set inflation back on the path towards its target of just below 2.0%.
But it has also politicised the bank like never before, as disciples of fiscal rectitude in Germany and other northern countries claimed the scheme indirectly enabled spendthrift policies in the south.
The ECB “should have ended its quantitative easing (QE) programme and its negative interest rate policy a long time ago,” the director of the Flossbach von Storch institute in Cologne, Thomas Mayer, told business daily Handelsblatt.
On Thursday, central bankers “will turn the page on QE, since there is no longer a serious risk of deflation” — a harmful downward spiral of prices braking activity — said economist Bruno Cavalier of Oddo BHF.
Price growth slowed from 2.2% in October to 2.0% last month in the 19-nation single currency area.
However “core” inflation excluding volatile food and energy prices remains sluggish at around one percent.
That’s one reason why analysts widely expect the central bank to play up its other tools for stimulating activity: interest rates stuck at historic lows “at least through the summer” of 2019 and reinvestments of the proceeds from its massive debt pile.
Soothing words will be needed as the ECB’s growth forecasts — for the first time stretching out to 2021 — will likely be revised downwards this time around, following a growth slowdown in the third quarter this year.
In the carefully hedged, coded language of central bankers, the ECB “will keep its options open about the future path of policy” to comfort markets, predicted Capital Economics analyst Jennifer McKeown.
Risks under control?
Such flexibility is needed at a time when the eurozone is hemmed in by risks at home and abroad.
Within the 19-nation single currency area, Italy is still wrestling with Brussels over its plan to boost its budget deficit next year, while French President Emmanuel Macron had to promise extra spending on the least well-off after weeks of sometimes violent “yellow vests” demonstrations.
Meanwhile outside the bloc, the risk of Britain crashing out of the European Union in March with no deal has been pumped up by parliamentary turmoil in London this week.
And Donald Trump’s trade confrontation with China — with harmful knock-on effects for the eurozone — rumbles on despite a 90-day truce for fresh talks.
Against such a gloomy backdrop, observers will have a special eye out for whether ECB President Mario Draghi updates his assessment that risks to eurozone are “broadly balanced” between positive and negative.
More broadly, a slowing global economy could find the eurozone unprepared for the next recession.
“In 2020 I expect the USA to experience a significant slowdown and export a recession to much of the world,” former ECB Vice-President Vitor Constancio told German business daily Handelsblatt Wednesday.
In any future downturn, governments will have to step in and support the economy with extra spending, rather than counting on the central bank to cushion the blow, Constancio warned.