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Europe Moves Toward Normalcy as Central Bank Shifts Guidance E.C.B. Shifts Guidance, as Europe Moves Toward Normalcy
(about 3 hours later)
FRANKFURT — Political instability in a heavily indebted eurozone country. The prospect of a trade war with the United States. Stock market turmoil.FRANKFURT — Political instability in a heavily indebted eurozone country. The prospect of a trade war with the United States. Stock market turmoil.
None of it fazed the European Central Bank, which took another small step back from crisis mode on Thursday.None of it fazed the European Central Bank, which took another small step back from crisis mode on Thursday.
The bank’s policymakers, who set monetary policy for the 19-nation euro area, held interest rates steady, but dropped language from their communiqué in which they had promised to ramp up economic stimulus measures again “if the outlook becomes less favorable.”The bank’s policymakers, who set monetary policy for the 19-nation euro area, held interest rates steady, but dropped language from their communiqué in which they had promised to ramp up economic stimulus measures 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.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.
The expression of confidence came despite warnings from Mario Draghi, the central bank’s president, about trade tensions with the United States.The expression of confidence came despite warnings from Mario Draghi, the central bank’s president, about trade tensions with the United States.
Mr. Draghi, in an obvious reference to President Trump’s plans to impose tariffs on imported steel and aluminum, said during a news conference that it was “dangerous” for countries to change the terms of trade unilaterally, rather than through negotiations.Mr. Draghi, in an obvious reference to President Trump’s plans to impose tariffs on imported steel and aluminum, said during a news conference that it was “dangerous” for countries to change the terms of trade unilaterally, rather than through negotiations.
The protectionist measures were part of a general diplomatic deterioration, Mr. Draghi added, and could damage the confidence that businesses needed before they would invest in expansion and hiring.The protectionist measures were part of a general diplomatic deterioration, Mr. Draghi added, and could damage the confidence that businesses needed before they would invest in expansion and hiring.
“If you put tariffs against your allies,” Mr. Draghi said, “one wonders who the enemies are.”“If you put tariffs against your allies,” Mr. Draghi said, “one wonders who the enemies are.”
It was the second news conference in a row in which Mr. Draghi had expressed exasperation with the Trump administration. In January, he accused Steven Mnuchin, the U.S. treasury secretary, of violating international agreements by making comments that caused the dollar to fall against the euro, giving American products a price advantage in foreign markets.It was the second news conference in a row in which Mr. Draghi had expressed exasperation with the Trump administration. In January, he accused Steven Mnuchin, the U.S. treasury secretary, of violating international agreements by making comments that caused the dollar to fall against the euro, giving American products a price advantage in foreign markets.
Still, the European Central Bank’s Governing Council was not alarmed enough by the potential trade war to interrupt its gradual exit from the emergency measures it has used to keep the eurozone from falling apart during a decade of financial and economic turmoil.Still, the European Central Bank’s Governing Council was not alarmed enough by the potential trade war to interrupt its gradual exit from the emergency measures it has used to keep the eurozone from falling apart during a decade of financial and economic turmoil.
While Thursday’s communiqué merely omitted a single sentence, and Mr. Draghi sought to downplay the importance of the change, investors appeared to find it significant.While Thursday’s communiqué merely omitted a single sentence, and Mr. Draghi sought to downplay the importance of the change, investors appeared to find it significant.
Markets reacted swiftly, with the euro jumping as much as 0.5 percent against the dollar, and the yield on the German 10-year bond, the benchmark for the region, rising five basis points.Markets reacted swiftly, with the euro jumping as much as 0.5 percent against the dollar, and the yield on the German 10-year bond, the benchmark for the region, rising five basis points.
“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.”“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.”
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.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.
On Sunday about half of Italians voted for populist candidates on the left and right, and left 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.On Sunday about half of Italians voted for populist candidates on the left and right, and left 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.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.”
The European Central Bank was also unfazed by the ups and downs of global stock markets since the Governing Council last met on monetary policy. Mr. Draghi pointed out that the market turmoil was centered on the United States and “it was pretty short.”The European Central Bank was also unfazed by the ups and downs of global stock markets since the Governing Council last met on monetary policy. Mr. Draghi pointed out that the market turmoil was centered on the United States and “it was pretty short.”
As expected, the Governing Council opted on Thursday to leave monetary policy unchanged. Interest rates will remain at a record low level.As expected, the Governing Council opted on Thursday to leave monetary policy unchanged. Interest rates will remain at a record low level.
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.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.That faction has been in the minority, but appeared to win the upper hand on Thursday.