The ECB’s Santa Claus Ain’t Coming to Town
If there is a Santa Claus in the euro zone, it’s Mario Draghi. Throughout his mandate, the president of the European Central Bank has handed the monetary union generous presents, which have averted the collapse of the euro, kept banks afloat and facilitated an economic recovery.
As the festive season approaches – and Europe’s mood is clouded by an incipient slowdown – the question is whether Draghi will deliver new gifts at his next press conference on December 13. Unfortunately, the ECB is unlikely to lift spirits this time. Economic and political considerations suggest the central bank will prefer to wait before offering any new support.
The next meeting of the ECB governing council will most likely mark the end of quantitative easing as we know it. As of January, the ECB is expected to stop adding to the 2.6 trillion euros ($2.95 trillion) of assets bought since March 2015, and only reinvest the money from the bonds that come due.
The reasoning is simple. It adopted QE to see off the risk of the euro area falling into a prolonged bout of deflation. Inflation is at 2 percent, just above the central bank’s target. More generous wage agreements, especially in Germany, ensure that the price level is very unlikely to fall soon. The ECB can therefore shelve its powerful tool, one that has been heavily criticized in Germany and other Northern countries. The policy of reinvestment will provide ample stimulus, according to Draghi.
Even though the termination of asset purchases is nearly with us, investors are still wondering whether Draghi has other secret gifts to deliver. After all, core inflation – which strips away volatile items like the oil price – slipped to just 1 percent in November. The euro zone grew by a mere 0.2 percent in the third quarter of this year, as Germany and Italy contracted. This has been blamed on one-off factors including temporary disruption in the German car industry. But what if it’s the start of something worse? The protectionist winds blowing from across the Atlantic and Italy’s bout of financial self-harm surely call for prudence.
There are two possible ways the ECB could respond. The first would be setting a later date for the forward guidance on when the ECB might lift interest rates, currently set for next autumn. The second would be providing a new round of cheap loans to banks. Such “long-term refinancing operations” are rather uncontroversial within the ECB’s governing council. They’d let banks continue to extend cheap credit to the economy, helping monetary policy.
But the ECB sees the risk to the euro zone economy as “broadly balanced”, meaning while it acknowledges some dangers, it sees positives too. The main point of optimism is the falling oil price, which has plummeted to around $50 dollar a barrel. That could boost companies and consumers. Another possible fillip are the steps the U.S. and China are taking to avoid escalating their trade dispute. If the truce holds, it would benefit exports.
Plus the timing of any new supportive measures would be awkward. Draghi steps down at the end of October, so any forward guidance that took the horizon of the first rate hike much beyond that date would be hard to believe. His replacement will have their own thoughts. And were the ECB to launch a new long-term refinancing operation for banks right now, it would be widely perceived as a present for Italy’s banks alone, given how expensive it is for them to sell bonds.
The ECB’s confidence could prove entirely wrong of course, should the euro zone slow down substantially in the coming months. Yet, for now, don’t expect a generous Christmas. Even Santa needs to rest every once in a while.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.