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For Draghi, Promises Are Still His Main Policy Option For Draghi, Promises Are Still His Main Policy Option
(34 minutes later)
FRANKFURT — Mario Draghi may have invented a new kind of policy tool. Call it verbal quantitative easing. FRANKFURT — Mario Draghi may have invented a new kind of policy tool. Call it verbal quantitative easing.
With some well-chosen words, Mr. Draghi, the president of the European Central Bank, sent a strong message on Thursday that more aggressive measures were in the works, even possibly the large-scale bond purchases known as quantitative easing.With some well-chosen words, Mr. Draghi, the president of the European Central Bank, sent a strong message on Thursday that more aggressive measures were in the works, even possibly the large-scale bond purchases known as quantitative easing.
“The governing council is unanimous in its commitment to using additional unconventional instruments within its mandate,” Mr. Draghi said.“The governing council is unanimous in its commitment to using additional unconventional instruments within its mandate,” Mr. Draghi said.
Two years ago, Mr. Draghi turned the tide in the eurozone crisis merely by promising to do “whatever it takes” to preserve the currency bloc. He is now soothing the markets again with the promise of stronger economic medicine. He also addressed concerns about the divisions in the E.C.B. over its next steps.Two years ago, Mr. Draghi turned the tide in the eurozone crisis merely by promising to do “whatever it takes” to preserve the currency bloc. He is now soothing the markets again with the promise of stronger economic medicine. He also addressed concerns about the divisions in the E.C.B. over its next steps.
But the question remains: How long will Mr. Draghi be able to appease the markets with incremental measures and updates that end with the effective equivalent of “tune in next month.” Even if markets remain calm, the larger issue is whether the E.C.B. will be able to reverse the worrisome deflationary trend that has plagued the economy.But the question remains: How long will Mr. Draghi be able to appease the markets with incremental measures and updates that end with the effective equivalent of “tune in next month.” Even if markets remain calm, the larger issue is whether the E.C.B. will be able to reverse the worrisome deflationary trend that has plagued the economy.
Mr. Draghi offered little specifics about how the E.C.B. would inject more stimulus into the economy. A large bond-buying program — like the six-year campaign the Federal Reserve just ended — faces significant legal and political challenges in Europe.Mr. Draghi offered little specifics about how the E.C.B. would inject more stimulus into the economy. A large bond-buying program — like the six-year campaign the Federal Reserve just ended — faces significant legal and political challenges in Europe.
“As far as verbal intervention by central bankers is concerned, Mr. Draghi has no equal,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in a note to clients. “Yet the reality is that the only thing that changed today is market perceptions of the E.C.B.”“As far as verbal intervention by central bankers is concerned, Mr. Draghi has no equal,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in a note to clients. “Yet the reality is that the only thing that changed today is market perceptions of the E.C.B.”
If the economy continues to sour, the markets may lose faith.If the economy continues to sour, the markets may lose faith.
Many economists and policy makers remain frustrated by the E.C.B.'s reluctance to do what the Fed, the Bank of England and the Bank of Japan have already done without any sign of the inflation that critics had predicted. On Thursday, Ángel Gurría, the secretary general of the Organization for Economic Cooperation and Development, joined those advocating a more aggressive approach. Many economists and policy makers remain frustrated by the E.C.B.’s reluctance to do what the Fed, the Bank of England and the Bank of Japan have already done without any sign of the inflation that critics had predicted. On Thursday, Ángel Gurría, the secretary general of the Organization for Economic Cooperation and Development, joined those advocating a more aggressive approach.
“There is an increasing risk of stagnation in the euro area,” Mr. Gurría said at a news conference in Paris. “Countries must employ all monetary, fiscal and structural reform policies at their disposal to address these risks and support growth.”“There is an increasing risk of stagnation in the euro area,” Mr. Gurría said at a news conference in Paris. “Countries must employ all monetary, fiscal and structural reform policies at their disposal to address these risks and support growth.”
Recent economic data has added pressure on the European Central Bank to begin more aggressive stimulus measures. The annual rate of inflation in the eurozone was 0.4 percent in October. That was up from 0.3 percent in September but still dangerously low in the eyes of many economists. Eurozone unemployment, meanwhile, remained at a stubbornly high 11.5 percent, according to data for September.Recent economic data has added pressure on the European Central Bank to begin more aggressive stimulus measures. The annual rate of inflation in the eurozone was 0.4 percent in October. That was up from 0.3 percent in September but still dangerously low in the eyes of many economists. Eurozone unemployment, meanwhile, remained at a stubbornly high 11.5 percent, according to data for September.
The eurozone is not officially in deflation, a destructive downward spiral in prices. But even the current low level of inflation can cause consumers to delay making purchases, companies to lose revenue and unemployment to soar above its already-high levels.The eurozone is not officially in deflation, a destructive downward spiral in prices. But even the current low level of inflation can cause consumers to delay making purchases, companies to lose revenue and unemployment to soar above its already-high levels.
The decline in oil prices, which are below $80 a barrel, have also held back inflation. Falling food prices, too, are complicating matters. The United Nations Food and Agriculture Organization reported on Thursday that world food prices fell in October for a seventh straight month, and it announced a forecast for a record global wheat crop this growing season.The decline in oil prices, which are below $80 a barrel, have also held back inflation. Falling food prices, too, are complicating matters. The United Nations Food and Agriculture Organization reported on Thursday that world food prices fell in October for a seventh straight month, and it announced a forecast for a record global wheat crop this growing season.
Even if European Central Bank policy is still doing little to rekindle inflation to a healthier level — the bank’s target is just below 2 percent — there is a method to Mr. Draghi’s approach.Even if European Central Bank policy is still doing little to rekindle inflation to a healthier level — the bank’s target is just below 2 percent — there is a method to Mr. Draghi’s approach.
To avoid alienating Germany, Mr. Draghi must first try everything short of large-scale government bond purchases. There is widespread fear in Germany that central bank bond-buying would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans worry that they would have to pick up the tab if some countries defaulted on bonds owned by the European Central Bank.To avoid alienating Germany, Mr. Draghi must first try everything short of large-scale government bond purchases. There is widespread fear in Germany that central bank bond-buying would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans worry that they would have to pick up the tab if some countries defaulted on bonds owned by the European Central Bank.
Mr. Draghi must also take care to avoid an open split on his governing council with Jens Weidmann, the president of the German central bank, who is a vocal opponent of government bond-buying.Mr. Draghi must also take care to avoid an open split on his governing council with Jens Weidmann, the president of the German central bank, who is a vocal opponent of government bond-buying.
The European Central Bank has already been buying private-sector assets since early October — 4.8 billion euros, or about $5.9 billion, in total so far. But Jörg Krämer, chief economist at Commerzbank in Frankfurt, and other analysts say there is no way the central bank can hit the €1 trillion target without resorting to purchases of government bonds. The European Central Bank has already been buying private sector assets since early October — 4.8 billion euros, or about $5.9 billion, in total so far. But Jörg Krämer, chief economist at Commerzbank in Frankfurt, and other analysts say there is no way the central bank can hit the €1 trillion target without resorting to purchases of government bonds.
To paraphrase Winston Churchill, Mr. Draghi will do the right thing only after exhausting all the alternatives.To paraphrase Winston Churchill, Mr. Draghi will do the right thing only after exhausting all the alternatives.
“I’m quite sure in the end Draghi will say, ‘Jens, we have to buy government bonds,’ ‘' Mr. Krämer said, referring to Mr. Weidmann. “I’m quite sure in the end Draghi will say, ‘Jens, we have to buy government bonds,’ ” Mr. Krämer said, referring to Mr. Weidmann.
There was more than just rhetoric in Mr. Draghi’s appearance at his news conference after Thursday’s monthly meeting of the governing council.There was more than just rhetoric in Mr. Draghi’s appearance at his news conference after Thursday’s monthly meeting of the governing council.
Mr. Draghi has said on previous occasions that the central bank would increase its balance sheet to the same level as the beginning of 2012. That had implied that the central bank would spend €1 trillion by buying bonds or issuing cheap loans to commercial banks. Mr. Draghi has said on previous occasions that the central bank would increase its balance sheet to the same level as at the beginning of 2012. That had implied that the central bank would spend €1 trillion by buying bonds or issuing cheap loans to commercial banks.
On Thursday, the central bank solidified those commitments and set a deadline. In its official statement, the E.C.B. indicated that it would aim to increase its balance sheet by €1 trillion by 2016.On Thursday, the central bank solidified those commitments and set a deadline. In its official statement, the E.C.B. indicated that it would aim to increase its balance sheet by €1 trillion by 2016.
“We’re one step closer to full-blown sovereign Q.E.,” Luke Bartholomew, investment manager at Aberdeen Asset Management, said in a statement, referring to quantitative easing.“We’re one step closer to full-blown sovereign Q.E.,” Luke Bartholomew, investment manager at Aberdeen Asset Management, said in a statement, referring to quantitative easing.
This stimulus goal was also signed by all members of the governing council. The unanimous endorsement erased doubt that Mr. Draghi might have been promising more than the rest of the council was prepared to deliver. And it also helped quash speculation of dissension within the council.This stimulus goal was also signed by all members of the governing council. The unanimous endorsement erased doubt that Mr. Draghi might have been promising more than the rest of the council was prepared to deliver. And it also helped quash speculation of dissension within the council.
“It’s fairly normal to disagree about things,” Mr. Draghi said. At their customary dinner on Wednesday night, he said, members of the council had “perhaps the best discussion we ever had.”“It’s fairly normal to disagree about things,” Mr. Draghi said. At their customary dinner on Wednesday night, he said, members of the council had “perhaps the best discussion we ever had.”
Carsten Brzeski, an analyst at ING Bank, wrote in a note to clients, “If there was any internal conflict within the governing council, Mario Draghi hushed it.”Carsten Brzeski, an analyst at ING Bank, wrote in a note to clients, “If there was any internal conflict within the governing council, Mario Draghi hushed it.”
The central bank’s statement also said that its staff and committees had begun preparing additional policy measures, should they be needed. While Mr. Draghi gave no deadline for them to present the plans, the statement was intended to show that groundwork was being laid.The central bank’s statement also said that its staff and committees had begun preparing additional policy measures, should they be needed. While Mr. Draghi gave no deadline for them to present the plans, the statement was intended to show that groundwork was being laid.
“This is the main message: The balance sheet will continue to expand,” Mr. Draghi said.“This is the main message: The balance sheet will continue to expand,” Mr. Draghi said.