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ECB’s Draghi Grows Bolder as His Tenure Nears End

Mario Draghi is teeing up some of the boldest policy moves of his eight-year term as European Central Bank president only four months before he steps down, potentially binding the hands of his successor for years.

The late burst of activism by the 71-year-old Italian is buoying European financial markets and catching the eye of President Donald Trump, even as it raises legal and practical questions about how much more the ECB can squeeze out of its existing toolbox.

The shift toward easier money, mirroring a move by the Federal Reserve, comes despite relative resilience in the eurozone economy, whose unemployment rate is at the lowest level in a decade.

Mr. Draghi’s final three policy meetings — in July, September and October — are suddenly in play for a policy decision. Analysts expect the ECB to cut interest rates, which are already negative, at or before its Sept. 12 meeting. Some also expect Mr. Draghi to announce the relaunch of the bank’s EUR2.6 trillion ($3 trillion) bond-buying program, known as quantitative easing or QE.

The latest moves are being weighed as the race to succeed Mr. Draghi in November enters a decisive phase. European leaders will meet in Brussels on Sunday in an effort to thrash out a handful of EU top jobs including the ECB’s next leader, whose term is nonrenewable.

Mr. Draghi has more freedom than ever to shape policy because key critics on his rate-setting committee have gone quiet as the race to lead the ECB approaches its climax.

There are no official candidates, and the decision is expected to be a byproduct of the horse trading involved in choosing the other top posts. But even though the perceived front-runners — including German central bank chief Jens Weidmann, former Finnish central banker Erkki Liikanen, its current head Olli Rehn and France’s central banker François Villeroy de Galhau — may have different approaches to monetary policy, they could all be bound for years by the easy-money policies Mr. Draghi pursues in the coming weeks.

“The room for maneuver for the next president, whoever it is, will be very limited,” said Juergen Stark, who was the ECB’s chief economist until 2011.

Mr. Draghi is doubling down on a strategy he has deployed for years, leaning on newly created instruments, including large-scale bond purchases and negative interest rates, to guard the bloc against too-low inflation that weakens spending and investment. This time, the eurozone is being buffeted by international trade tensions, and investors have grown markedly more cautious about future levels of inflation.

Once again, ECB officials say, Mr. Draghi is putting the ECB’s rate-setting committee on course for action, reducing the scope for any dissent. He followed a similar game plan before the announcement of the ECB’s bond-buying programs in 2012 and 2015, officials say.

Those programs were opposed by Mr. Weidmann but no one has spoken out publicly against the current easing signals. Mr. Weidmann has even softened his past opposition to buying bonds, which is controversial in Germany due to concerns it puts the central bank in the position of financing governments.

“The fact that Draghi can still afford this strategy, despite his retirement in October, clearly shows the scale of his support in the ECB governing council,” said Joerg Kraemer, chief economist at Commerzbank.

Mr. Draghi isn’t the first ECB head to weigh action in the waning months of his term. His predecessor, the Frenchman Jean-Claude Trichet, twice raised interest rates in 2011 — actions that are now widely considered a mistake.

Unlike Mr. Trichet, who created more room for his successor to cut rates, analysts say Mr. Draghi is constraining his successor by exhausting an already depleted toolbox. The ECB’s key interest rate is set at minus 0.4%, some 3 percentage points below that of the Fed, and the bank is sitting on more than EUR2.5 trillion of eurozone debt.

Until recently, the ECB was cruising toward higher interest rates after phasing out its QE program in December. But the timeline for rate increases has been repeatedly pushed back in recent months, as international trade tensions intensified, triggering a downturn in Europe’s key manufacturing sector.

As Fed officials started to indicate in early June that the U.S. central bank might cut interest rates, Mr. Draghi followed suit, raising the prospect of rate cuts or fresh bond purchases at a news conference in Lithuania — but only if the economy deteriorated. Investors reacted coolly, sending the euro higher against the dollar.

Mr. Draghi changed tack at an ECB conference in Sintra, Portugal, on June 18, signaling that new stimulus would be forthcoming within weeks unless the economy improved — shifting the ECB’s policy bias from inaction to action.

Yves Mersch, an ECB board member who isn’t in the race to succeed Mr Draghi, argued Saturday that the eurozone economy is fundamentally strong and cautioned against “erratic policy debates for the purpose of creating short-term stimulus.” Such debates risked undermining the central bank’s credibility in the long run, he said.

Still, Mr. Draghi could be doing his successor a favor by advancing decisions that could prove tricky for a new president, including the potential to expand the pool of bonds that the ECB can buy.

Under its current rules, the ECB can’t buy more than 33% of the debt of any individual government, but Mr. Draghi hinted this month that those rules could be altered. Raising the limit to 50%, for instance, could open up an additional EUR1 trillion of bonds for purchase, according to analysts.

“If you are a strong president and run an institution as important as the ECB, you cannot just wait and say, ‘I’m a lame duck,'” said Guntram Wolff, director of Bruegel, a Brussels think tank. “You have to take care of the eurozone and react to incoming data.”
Source: Dow Jones

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