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Draghi’s Dangerous Farewell

Sep 9, 2019 Ashoka Mody

The risks of further monetary stimulus measures by the European Central Bank outweigh the benefits. Additional stimulus will either amount to less than anticipated or will not be sustained – yet it could still undermine the eurozone's financial system and public finances in far-reaching ways.

PRINCETON – Mario Draghi risks deepening the eurozone’s problems in the final weeks of his eight-year term as president of the European Central Bank. He has promised that the ECB will reduce interest rates further to spur the eurozone economy. But policymakers have room for only modest rate cuts, which will do little to boost growth – and will put potentially intolerable pressure on the eurozone’s fragile banks.

Back in June, Draghi said that the ECB was preparing a new dose of stimulus, including further reductions of its policy interest rate and a renewal of quantitative easing (QE) through purchases of government bonds. And he continued to call for “a significant degree of monetary stimulus” following the ECB Governing Council’s most recent meeting on July 25.

More recently, Christine Lagarde, who is due to succeed Draghi as ECB president on November 1, said the central bank “has a broad tool kit at its disposal and must stand ready to act.” Likewise, Olli Rehn, governor of Finland’s central bank and a member of the ECB’s Governing Council, called for “substantial and sufficient” action. Financial markets thus expect aggressive “big-bang” measures from the ECB at the council’s next meeting on September 12.

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0 Comments on this paragraph, 8 in all 8 Comments on this article

Paul Friesen Sep 16, 2019

In Greece, unemployment is still about 17%. In Italy, almost 10%. In Spain, over 14%. All of these countries desperately need to put people back to work.

I agree that monetary policy, by itself, is not a good option when interest rates are so low for so long. What is needed is fiscal stimulus from the Eurozone's more fortunate governments to boost demand. They need to borrow some of the money the ECB has already created and use it to increase demand in the whole region.
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B Wilds Sep 14, 2019

With interest rates flat or negative in real terms and many people are advocating they still need or should go lower. Unfortunately, the concept that a rising tide floats all boats or trickle-down economics tends to heavily favor the rich.

Currently, much of the recent economic data indicates lower-interest rates have been a "one-time" economic tailwind that is rapidly weakening and lost its kick. This puts both the central banks and the economy between a rock and a hard place. More on this subject in the article below.

https://brucewilds.blogspot.com/2019/09/central-banks-low-rate-solution-remains.html
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Henk Crop Sep 13, 2019

The low interest rates have, after so many years, lost their potential to stimulate the economy. It only leads to high housing and stock prices.
It hurts the pensionfunds and the financial services industry and in general leads to an unbalanced allocation of capital.
The beneficiaries are the governments of countries like Italy and France with their high debts.
The solution is that they increase their competitiveness.
On the Global Competiviveness Index France ranks 17 th. and Italy 31 st.
( Germany 3 rd.).
From this point of view the appointment of mrs. Lagarde as ECB president does not support confidence in the Euro.
Also, Macron has the ambition to make the Eurozone a transfer Union.
It is time the northern EU members wake up.
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Walter Gingery Sep 11, 2019

The EU as presently constituted is like a patient on life support. The ECB's belated QE program gave it a dose of monetary opioid, but the cure is not in sight, as long as the members of the confederation, like bedside doctors, can't even reach agreement on the nature of the disease.
- Walter Gingery Sep 16, 2019
  
  The ECB's QE is misguided; it's a supply-side cure offered to a demand-side malady.
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Paul Daley Sep 10, 2019

Good article. The ECB needs to find counterparties beyond the regions' banks and governments if it is to sustain economic activity while avoiding new pyramids of public debt and over-valued assets that in turn have produced the dreaded "doom loops" between banks and governments. The problem is that the region's banks and governments are the ones it's primarily chartered to deal with. The obvious solution is to open a channel for lending to new counterparties like the region's taxpayers. That would allow the ECB to pull funds out of asset markets while maintaining demand for goods and services. It would also give the ECB enough leverage over borrowers to ensure it could contract demand when necessary.

Like other central banks, the ECB is just a prisoner of its history as a reserve bank. It needs to begin thinking a little more like a national bank if it is to retain leverage over the economy in Europe.
- Henk Crop Sep 27, 2019
  
  Paul. You forget that the Eurozone is not a Nation, but a confederation of States. It was poorly designed and implemented in members who had little in common. The Euro was launched, not as an instrument to achieve cohesion, among the Eurozone members. It was pushed by France to keep control over Germany. Perhaps it is time to consider splitting up the Euro into 2 currencies.
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