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Italy’s Populist Surge May Delay End to Eurozone Stimulus Europe Moves Toward Normalcy as Central Bank Shifts Guidance
(about 9 hours later)
FRANKFURT — The European Central Bank was expected to take another small step toward normalcy Thursday. Then came Italy. FRANKFURT — The European Central Bank took another small step toward normalcy on Thursday, indicating it was unfazed by new threats to the stability of the eurozone and world trade.
A confused election result in one of the eurozone’s biggest and most troubled countries may well prompt the central bank’s policymakers to slow down its exit from crisis mode. The specter of a trade war with the United States could also give members of the bank’s Governing Council reason to pause. The bank’s policymakers, who set monetary policy for the 19-nation eurozone, held interest rates steady, but dropped language from their communiqué in which they had promised to ramp up its economic stimulus program again “if the outlook becomes less favorable.”
Only a week ago, many analysts were predicting that the council, which was to meet on Thursday to set monetary policy for the 19-nation eurozone, would drop language from its communiqué in which it promised to ramp up its economic stimulus program again “if the outlook becomes less favorable.” It was a subtle but important change. By omitting the phrase, which it has repeated since December 2016, the central bank was in effect saying that the eurozone was no longer in imminent danger of going up in flames, and that it was time to begin stowing the fire hoses.
That would have been a subtle but important change. By omitting the phrase, which it has repeated since December 2016, the central bank would in effect be saying that the eurozone was no longer in imminent danger of going up in flames, and that it was time to begin stowing the fire hoses. “It’s a tacit acknowledgment that the economic outlook in Europe is rosier than it was,” James Athey, a senior investment manager at Aberdeen Standard Investments, said in a statement. He added, “The reaction should not be overdone. This is an infinitesimal step forwards.”
On Sunday, though, about half of Italians voted for populist candidates on the left and right, while leaving no party with a clear mandate to form a government. There is now very little chance that Italy will make the sweeping changes needed to break its economy out of prolonged stagnation. Some analysts had predicted that the central bank would make no changes in the language it uses to communicate its intentions to financial markets, in light of a confused election result in Italy, one of the eurozone’s biggest and most troubled economies. In addition, the prospect of a trade war with the United States poses a danger to the eurozone economy.
The country’s political deadlock and economic doldrums are a threat to the rest of the common currency area. Italy’s government debt — measured as a percentage of economic output — is among the highest in the world and, in Europe, second only to Greece’s. On Sunday about half of Italians voted for populist candidates on the left and right, while leaving no party with a clear mandate to form a government. There is now very little chance that the country will make the sweeping changes needed to break its economy out of prolonged stagnation.
Its political deadlock and economic doldrums are a threat to the rest of the common currency area. Italy’s government debt, measured as a percentage of economic output, is among the highest in the world and, in Europe, second only to Greece’s.
But Italy also has the eurozone’s third-largest economy, with output 10 times that of Greece, making it a far bigger danger to the region’s financial stability if investors begin to doubt the government’s solvency.But Italy also has the eurozone’s third-largest economy, with output 10 times that of Greece, making it a far bigger danger to the region’s financial stability if investors begin to doubt the government’s solvency.
“We have to bury the hope that Italy will catch up with Germany and France with reforms,” Holger Schmieding, chief economist at Berenberg, a German bank, said over lunch with reporters in Frankfurt on Tuesday. “Italy will more likely worsen its ability to carry its debt.”“We have to bury the hope that Italy will catch up with Germany and France with reforms,” Holger Schmieding, chief economist at Berenberg, a German bank, said over lunch with reporters in Frankfurt on Tuesday. “Italy will more likely worsen its ability to carry its debt.”
Italy is not the only risk for Europe to appear in recent days. Trade relations with the United States are in doubt after President Trump threatened to impose tariffs on steel and aluminum imports, prompting the European Union to consider retaliating with levies on products like Harley-Davidsons and bourbon. Surveys show that the threat of a trade war has clouded the optimism that had prevailed among European consumers and business managers.Italy is not the only risk for Europe to appear in recent days. Trade relations with the United States are in doubt after President Trump threatened to impose tariffs on steel and aluminum imports, prompting the European Union to consider retaliating with levies on products like Harley-Davidsons and bourbon. Surveys show that the threat of a trade war has clouded the optimism that had prevailed among European consumers and business managers.
All those uncertainties are rattling financial markets. As a result, the Governing Council “may not want to add to the confusion by changing its monetary policy statement this week,” analysts at Barclays said in a note to investors. As expected, the Governing Council opted on Thursday to leave monetary policy unchanged. Interest rates will remain at a record low level. Mario Draghi, the bank’s president, is scheduled to deliver remarks at a news conference beginning at 2:30 p.m. (8:30 a.m. Eastern Time).
Instead, policymakers will probably leave well enough alone and continue to express their readiness to ramp up the stimulus if there is any sign of trouble. The council is scheduled to announce any decisions at 1:45 p.m. Frankfurt time (7:45 a.m. Eastern time), and Mario Draghi, the president of the central bank, planned a news conference beginning at 2:30 p.m. There is a faction on the Governing Council that is worried that inflation, now dormant, could get out of hand if the central bank waits too long to stop its purchases of government and corporate bonds, a form of money printing intended to stimulate the economy.
To be sure, there is a faction on the Governing Council that is worried that inflation, now dormant, could get out of hand if the central bank waits too long to stop its purchases of government and corporate bonds, a form of money printing intended to stimulate the economy. That faction has been in the minority, but appeared to win the upper hand on Thursday.
So far that faction has been in the minority.
More likely, the outcome of the meeting will be similar to the one in January. Then, members of the Governing Council talked about whether the central bank should change what is known as its forward guidance — the wording it uses to signal its intentions to financial markets. A tweak in the language would set the stage for the central bank to phase out bond purchases by the end of this year and begin raising official interest rates in 2019.
But, according the European Central Bank’s official account of the meeting, “changes in communication were generally seen to be premature at this juncture.”