Mario Draghi did not want to go down fighting.
The president of the European Central Bank had been battling to stave off recession, low inflation and bank failures since the moment he took the job at the height of the financial crisis in 2011. A year later, he vowed to do “whatever it takes” to save the euro from destruction.
In came all sorts of unusual fire-fighting techniques, including flooding the ailing banks with cheap loans and launching a quantitative easing (QE) program that would vacuum up €2.6-trillion ($3.9-trillion) of government debt, covered bonds and asset-backed securities across the euro zone.
It all worked, to a degree. Growth returned, banks became healthier, inflation, while still low, at least moved solidly into positive territory. As Europe climbed out of the economic hole, stimulus measures were withdrawn and hints were made that ultralow interest rates would rise. For Mr. Draghi, it was mission accomplished. He could step down from the ECB at the end of his second term, in October, say arrivederci with a satisfied smile and remove the panic button from his desk before making way for his successor.
Not so fast – he’s at it again. That’s because the euro zone economy is slowing down fast – faster than the ECB had anticipated – and Mr. Draghi wants to do everything he can to insulate it from further deterioration. “When you are in a dark room, you move with tiny steps,” he said at a Thursday news conference in Frankfurt after the ECB’s surprise announcement of fresh stimulus measures, implying that the bank needs to be proactive rather than reactive as the economy softens.
The shocker piece of data was the ECB’s new growth forecasts for the euro zone. It now expects gross domestic product to rise 1.1 per cent this year, a big fat downgrade from its previous forecast of 1.7 per cent. Next year, GDP growth of 1.6 per cent is expected, down from 1.7 per cent.
The GDP downgrade must come as an embarrassment to Mr. Draghi and the ECB governing council, which was clearly behind the curve with its forecasts. Private-sector economists were calling for euro zone growth of only about 1.4 per cent this year and the Organization for Economic Co-operation and Development was even more pessimistic, with a mere 1-per-cent growth prediction.
In the fall, Mr. Draghi had labelled euro zone growth “robust.” Bad call on his part. Since then, Italy, Europe’s perennial economic slug, has stumbled back into recession – its third since the financial crisis – and Germany, hit by an auto-industry slowdown, is on the verge of one.
So the ECB is opening up the throttle again. Steen Jakobsen, chief investment officer of Denmark’s Saxo Bank, said “the ECB is hitting the panic button,” which is only a slight exaggeration.
QE, which was wound down three months ago after the ECB’s four-year orgy of bond buying, is not coming back. But cheap funding for euro zone banks is. The ECB said it would hold another round of so-called Targeted Long-Term Refinancing Operations in September and that they would continue until March, 2021. The operations offer banks below-market-rate loans in the hopes that will keep their lending spigots open, all the better to grease the economy.
The ECB will also keep interest rates on hold until at least the end of 2019, and possibly longer. It had previously said that rates would stay on hold only through the summer (the main deposit rate at the bank is minus-0.4 per cent). The ECB said it would also reinvest the principal payments of maturing securities bought under the QE program “for an extended period of time” beyond the point it starts to raise interest rates.
In spite of the climbdown on 2019’s growth rates and the relaunch of cheap financing for the banks, Mr. Draghi wasn’t Mr. Doom and Gloom at the news conference on Thursday. His growth forecasts for 2020 and 2021 were barely unchanged and he noted that several key economic indicators, including wage growth, were moving in the right direction. Carsten Brzeski, chief economist for ING Germany, said the ECB is evidently “hoping that today’s measures are sufficient to put a floor under the current economic slowdown.”
But just as the ECB guessed wrong on its 2019 growth forecast, it could be wrong on its guess that the euro zone economy is not going to get far worse. China is slowing down and a global trade war could easily inflict more damage on the big economies, especially Germany, Italy and other exporters. Brexit, which is supposed to happen on March 29, is a huge risk to the euro zone, especially since the chances of Britain departing without a trade deal with the European Union remain high. The Italian economy, run by amateur populists who seem more interested in buying votes than making productive investments, could get worse.
There’s more. The EU elections in May could produce strong gains for the euroskeptic populist parties, straining the European integration project and sending investors fleeing. The chances of a new crisis seem to be rising. Mr. Draghi may be leaving the ECB just at the right time.