Mario Draghi was able to bask in triumph for about an hour.
The president of the European Central Bank announced a surprisingly bold stimulus package on Thursday, and financial markets were suitably impressed. As soon as he started to explain his reasoning, however, disappointment set in.
Draghi’s first message amounted to “We have plenty of monetary-policy ammunition, and we intend to use it.” His subsequent clarification was “Come to think of it, maybe we don’t have that much.”
Give Draghi credit for ingenuity. He announced cuts to all three of the ECB’s policy interest rates, including a drop to minus 0.4 percent in the rate it pays on banks’ deposits. He added 20 billion euros a month to the ECB’s bond-buying program — more than expected. He widened the program’s pool of eligible assets to include high-quality corporate bonds, and he announced a new refinancing mechanism that will lend very cheaply to banks that supply credit to the euro area’s economy.
Having disappointed investors with the ECB’s previous policy announcement, Draghi had apparently resolved this time to over-deliver. European stock markets surged and the euro depreciated sharply, recognizing a bold new easing of policy.
The mood changed abruptly after Draghi explained the central bank’s thinking on negative interest rates. He said he expected no further cuts. The ECB had looked at ways to make the deposit rate more negative without putting banks under stress, and had concluded that the institutional complexity of Europe’s banking systems made this difficult. So he set a floor for interest rates, even as he insisted that the ECB had plenty of options for further easing.
The theory seems to be that expanded quantitative easing and the new refinancing mechanism can deliver all the additional monetary stimulus that might be required. That’s questionable. In any event, investors were left confused and underwhelmed.
The ECB, it must be emphasized, isn’t at fault here. For months now Draghi has done everything he plausibly could, and more, to provide monetary stimulus. But the limits of that policy are finally starting to bind.
What’s needed now is fiscal stimulus. Draghi said as much, albeit elliptically. The central bank has no formal role in making fiscal policy, and he’s unwilling to cross political lines and exceed his authority.
That’s a pity. With prices in the euro area now falling, and the central bank’s inflation target moving farther out of reach, Europe’s governments need to shoulder some of the burden of supporting demand. So far, the region’s worsening prospects have left them unmoved. Enough. Draghi should take a risk — and try harder to change their minds.
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