Shadow Council

Mario Draghi's Weak Medicine

European Central Bank President Mario Draghi at the European Parliament's Economic and Monetary Affairs Committee in Brussels last February.
  • Why it matters

    Why it matters

    With inflation back in negative terriroty, Mario Draghi is in danger of losing control of the euro zone’s economy. Many economists wonder whether the ECB has the tools left to turn the tide.

  • Facts


    • Annual inflation in the euro zone fell to -0.2 percent in February, its lowest level in a year.
    • The ECB’s governing council will meet Thursday. It is widely expected to cut the central bank’s deposit rate further into negative territory to force banks to lend.
    • Banks and economists are increasingly worried that cutting the deposit rate – effectively charging banks to park excess reserves – could endanger financial stability.
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The markets are pretty clear about what they want to see from the European Central Bank’s meeting Thursday to set interest rates for the euro zone: This time, Mario Draghi has to deliver.

It’s a tall order for Europe’s top central banker, who is fast running out of tools to convince stock markets that he has what it takes to – in the words of one economist – “shock” the European economy back to health.

That’s partly because the European Central Bank’s medicine hasn’t really worked so far. Consumer prices in the 19-nation euro currency bloc fell 0.2 percent year-over-year in February, mainly due to falling oil prices and a weakening global economy. That’s the lowest level in a year, and far below the ECB’s goal of seeing inflation increase by 2 percent.

“The current ECB policy obviously has not worked. The question you have to ask yourself is, in this situation, should we do more of the kind of medicine that has not worked in the past?” said Jörg Krämer, chief economist of Commerzbank and a member of the ECB shadow council, a panel of top European economists convened by Handelsblatt about four times a year.

With the euro zone back in deflationary territory, Mr. Draghi has promised he’ll do what it takes to get the euro zone back on track at the ECB’s rate-setting meeting on Thursday. Markets are widely expecting him to once again cut the central bank’s deposit rate – the rate it charges banks that park extra reserves at the ECB – in a bid to force Europe’s banks to lend out more money.

In the eyes of Janet Henry, the chief economist of British bank HSBC, and another member of the ECB shadow council, Mr. Draghi has no choice but to push forward. He can’t afford another disappointment like the one he had in December, when the ECB only slightly eased its monetary policy and sparked a sell-off on global stock markets.

This time, Mr. Draghi can’t hold back: “Given the deterioration in the inflation outlook, this is the time to shock inflation expectations,” Ms. Henry said, adding: “This is an important meeting. He needs to get it right.”

The trouble is that we’ve been here before. This time last year, Mr. Draghi pulled out all the stops. The European Central Bank’s president launched a massive €1.1-trillion bond-buying program, known around the world as quantitative easing.

QE was seen as the bazooka that would finally start pushing inflation back towards the ECB’s target. One year later, inflation is back in negative territory, and top economists are starting to openly wonder whether the central bank has any real power left to move the economy.

“The efficacy of monetary policy … is decreasing rapidly,” warned Andrew Bosomworth, the head of the German division of the major bond investor PIMCO and another member of the ECB shadow council.

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