Unconventional measures are seeing a comeback at the ECB

Geopolitical tensions, emerging protectionism and the vulnerability of emerging markets are putting the economy under severe pressure, according to Draghi. EPA-EFE/RONALD WITTEK

The ECB’s key interest rate remains at zero and is expected to remain at that level at least until summer 2020. However, ECB president Mario Draghi is suggesting that a decisive fiscal policy is far more important for the eurozone, especially for Germany and Italy. EURACTIV Germany reports.

“We expect the key interest rate to remain at current or lower levels at least until mid-2020,” Draghi said after Thursday’s Governing Council’s meeting on monetary policy (25 July).

Draghi announced that the rate would, in any case, be kept at these levels as long as necessary. This approach would bring inflation closer to the ECB’s target in the medium term.

The corresponding step towards lowering the key interest rate further could then be taken after the summer break.

The inflation target of “below but close to 2%” is still being pursued. But there are voices in the Council calling for the target to be contemplated, Draghi said.

This should not mean, however, that the ECB would accept a lower inflation rate at some point. This must be corrected upwards as quickly as possible. According to Draghi, geopolitical tensions, emerging protectionism and the vulnerability of emerging markets, are severely pressuring the economy.

As a further response to the shaky global economy, the bond purchase program could also be launched once again. And if banks store money at the ECB instead of lending it to companies, they pay a penalty interest of 0.4% as usual.

Commission’s forecast paves the way for new ECB stimulus

The European Commission kept its growth forecast unchanged at 1.2% on Wednesday (10 July) but revised downwards inflation to 1.3% for this year and the next, strengthening the case for further monetary stimulus as global economic risks worsen.

The chief economist of ING-DiBa, Carsten Brzeski, considered the purchase of government bonds by Germany’s public broadcasting radio station Deutschlandfunk to be sensible. This rather unconventional measure has significantly improved the financing conditions for the entire economy in recent years.

However, now the European economy is experiencing a slump, especially in Germany.

Among eurozone countries, the industry is most strongly oriented towards foreign countries. It is, therefore, most affected by geopolitical uncertainties, ifo economic affairs director Timo Wollmershäuser told EURACTIV.

The ifo Institute for Economic Research published on Thursday (25 July) its new Business Climate Index, which has reached its lowest level in the past six years.

These have been difficult times for the German economy and made Germany one of the leading causes of the eurozone’s economic slowdown.

At the same time, however, Germany also has the greatest room for manoeuvre in its fiscal policy.

“Germany invests quite a lot, contrary to what is often said. However, there’s still room for manoeuvre,” said Wollmershäuser. For example, by investing in infrastructure, care, childcare, or by reducing taxes.

Draghi made clear that these fiscal policy measures would have to be implemented.

He also urged member states to take the EU Commission’s country-specific reform recommendations seriously and to implement them more decisively. Italy was one of the countries he specifically mentioned, saying it should be more decisive with its fiscal policies.

He also urged the completion of the European banking union, because monetary policy has its limits.

ECB ponders further monetary stimulus to counter trade, Brexit risks

The European Central Bank decided on Thursday (6 June) to keep the low interest rates unchanged at least until mid-2020, and confirmed that it is considering further monetary stimulus, including further rate cuts and restarting the asset purchasing programme, to counter the trade tensions and Brexit uncertainty.

A large September-package 

For Wollmershäuser, these additional measures will only have an impact in September, once the next targeted longer-term refinancing operations (TLTRO III) have been launched.

This instrument,  devised by the ECB’s Governing Council, rewards banks that grant loans to companies on good terms. In other words, the instrument aims to stimulate the economy further.

“Before we bring out the next package, we want to wait and see whether this stimulus has an impact,” said Wollmershäuser.

Marcel Fratzscher, president of the German Institute for Economic Research, expects a whole package of measures for September – such as lowering the deposit rate and a renewed purchase of government bonds in the coming months.

Christine Lagarde, a non-conventional pick for the ECB presidency

A lawyer by training, Christine Lagarde has been nominated to succeed Mario Draghi as president of the European Central Banck (ECB). The IMF director has an atypical profile, due to her lack of banking experience and question marks over her past. EURACTIV France reports.

Fratzscher is demanding that Germany change its policies instead of complaining about the ECB’s low-interest-rate policy.

“With its slowing industry, Germany has become Europe’s economic trouble spot,” said Fratzscher. The country needs a domestic stimulus and a more expansionary fiscal policy to better cope with global risks, according to the institute’s president.

As a ray of hope, however, Draghi cited positive developments on the labour market. Despite slowing growth, the labour market is proving to be very resilient. At any rate, the ECB would stick to its “strongly accommodating monetary policy”, Draghi made clear.

Draghi’s mandate ends in October when France’s Christine Lagarde takes over as president of the European Central Bank. However, Draghi denied rumours that he could then take over the leadership of the International Monetary Fund.

“I’m very honoured, but I’m not available for that,” he said.

[Edited by Zoran Radosavljevic]

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