Taper but no tantrum

Draghi has barbed words for Germany as ECB sets end to asset purchases

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Riga outing no picnic. Source: Reuters

The end is in sight, and for once German economists are cheering. After more than three years and over €2 trillion in debt bought from euro zone countries, the European Central Bank plans to end its asset purchase program at the end of 2018.

The central bank will briefly taper its monthly asset purchases beginning in October, to €15 billion ($17.5 billion) from €30 billion currently, for the last three months of the year before ending it in December. However, the ECB will continue to reinvest principal from maturing bonds “for an extended period of time” afterwards. And it will leave interest rates unchanged “at least” through the summer of 2019.

In setting a hard end to asset purchases, the ECB surprised some with its decisiveness. After so many years of procrastinating, it seemed likelier they would wait until July to decide on the program. “It’s something of a surprise that the ECB is leaning so far out the window,” said Holger Schmieding, chief economist at Berenberg Bank. Clemens Fuest, head of the ifo Economic Research Institute in Munich, praised the action: “It is very welcome that the purchase program of the ECB is coming to an end,” he said.

Yet on the whole, Mr. Draghi’s remarks and the policy actions were perceived as somewhat dovish in financial markets. ECB chief Mario Draghi was at pains on Thursday to reassure investors that there would be an “ample degree of monetary accommodation” in the euro zone. The very gradual tightening of monetary policy comes as higher oil prices pushed ECB staff to revise their forecast for inflation slightly upward for 2018, and a slow first quarter prompted them to revise their forecast for GDP growth slightly downward.

Germany out of balance

Nonetheless, Mr. Draghi said the governing council was confident that the euro zone was on the right path to sustainable growth and inflation near the bank’s 2 percent target. But while touting the success of the ECB’s monetary policy, he also had some barbs for Germany regarding its fiscal policies.

“In order to reap the full benefits from our monetary policy measures,” Mr. Draghi said at a press conference following the meeting of the governing council in Riga, Latvia, “other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities.”

He proceeded to explain that he meant not only high-debt countries needing to rebuild their “fiscal buffers,” but also that other, unnamed, countries need to intensify “efforts towards achieving a more growth-friendly composition of public finances.” Countries, you know who you are.

While it is important for member countries to implement the limits on debt and deficits, he said, it is also important to observe “the macroeconomic imbalance procedure over time and across countries.” The European Commission has repeatedly chastised Germany for its excessive current account balances, well over the 6 percent of GDP that should trigger corrective measures. In particular, the EU – along with the International Monetary Fund, the OECD, and the US Treasury Department – have admonished Germany to do more to promote investment and consumption.

Freeing the ‘hostage’

In any case, as the ECB moves away from its loose monetary policy, it will now be up to the national governments to do more to foster integration. The long period of low interest rates worked as long as inflation remained low, and coincidentally helped hold the EU together. But the ECB cannot remain hostage to politics, wrote Handelsblatt’s Frankfurt correspondent Jan Mallien in an editorial. Unless member countries remove the doom loop between government debt and banking systems, and strengthen the common capital market, the ECB will not be free to exercise its mandate of keeping prices stable over the long term. Already it has lost some prestige for seeming too political in the eyes of many German economists.

But Mr. Draghi was equally hard on his own native country, Italy. He cautioned against over-dramatizing the types of policy changes that follow an election. He added, with what may have been wishful thinking, that “differences are going to be discussed within the existing treaties.” He noted that even though the yield on Italian bonds had risen, the impact was far less than at the height of the euro crisis. Nor has there been any sign of contagion with other southern EU countries.

When asked about the recent remark from German economist Clemens Fuest that there should be an exit procedure from the euro zone, just as there is from the EU itself, Mr. Draghi testily responded that there is no point in discussing the existence of something that is “irreversible.” As the journalist waited for further explanation, he looked at her and said, “That’s it.” Period.

Several Handelsblatt correspondents contributed to this report. Darrell Delamaide is a writer and editor for Handelsblatt Global in Washington, DC. To contact the author: d.delamaide@extern.handelsblatt.com.

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