Support for Mario Draghi’s brand of aggressive money printing has never been lower among rate-setters.POOL New/Reuters
Mario Draghi may be the man who saved the euro but his last press conference as President of the European Central Bank on Thursday is unlikely to be the grand finale he was hoping for.
Inflation in the euro zone languishes at less than half the ECB’s target, the economic outlook is darkening again and support for Draghi’s brand of aggressive money printing has never been lower among rate-setters.
All that is taking the shine off an eight-year reign that had its climax when Draghi single-handedly averted a collapse of the euro in 2012 with a pledge to do “whatever it takes” to preserve the currency – code for coming to the rescue of heavily indebted euro zone countries.
His later moves have been less well supported and Draghi is set to spend at least part of his last press conference defending a decision to restart the ECB’s 2.6 trillion euro bond-buying program despite opposition from a third of fellow rate setters in September.
“We expect Draghi to come up with a strong – emotional – plea in support of the September package, probably combined with a broader attempt to safeguard the legacy of all measures taken under his leadership,” said Carsten Brzeski, an economist at ING.
Recent data is on his side. Price growth in the euro zone was a paltry 0.8% last month, a global trade war is threatening to push the bloc’s largest economy, Germany, into a recession and the risk of a hard Brexit continues to loom large.
The ECB is all but certain not to make any policy changes on Thursday, six weeks after unveiling a package including new asset purchases worth 20 billion euros a month, a rate cut and a pledge to open the money taps further if needed.
But investors will be trying to gauge sentiment on the Governing Council after the very public spat that followed the last meeting and culminated in Germany’s appointee to the ECB’s board, Sabine Lautenschlaeger, stepping down.
The turmoil is certain to extend into the mandate of Draghi’s successor, Christine Lagarde, who will take over on Nov 1 promising a review of the bank’s “monetary framework,” likely meaning its goal and tools.
“Despite Draghi’s reputation as saviour of the euro, controversy over his policies will linger, forcing incoming president Lagarde to deal with them in next year’s strategy review,” Anatoli Annenkov, an economist at Societe Generale, said.
HAWKS CIRCLE
Lagarde will have to deal with objections that Draghi’s policy of sub-zero deposit rates and massive bond purchases are hurting savers, squeezing banks and pension funds and inflating financial bubbles, while doing little for inflation.
And it’s not just a minority of prominent hawks – including the central bank governors of France, Germany and the Netherlands – who question the wisdom of resuming the bond buying program.
France’s representatives on the Governing Council have joined the chorus and 95% of respondents in a Reuters poll said the ECB’s stimulus package would not significantly help in bringing inflation back to the ECB’s target of just under 2%.
“Dissent within the Governing Council against the latest package cannot be ignored, especially since it is no longer coming exclusively from the same core countries,” Gilles Moec, chief economist of French insurer Axa Group, said.
The problem for the ECB is that some of the major factors depressing prices are outside of its control.
These range from demographic and technological changes to the euro zone’s reliance on exports, in particular German manufacturing, which leaves it to bear the brunt of the trade war.
With the ECB’s firepower now largely spent, Draghi and his successor are likely to continue urging governments that are running a surplus, such as Germany and the Netherlands, to invest more to generate economic growth at home.
But latest budget figures, showing only a modest expansion, suggest their calls are likely to be frustrated for now.
“We continue to expect sizable stimulus only in case of a deeper downturn,” Oliver Rakau, an economist at Oxford Economics, said.