ECB’s Draghi Hints at Prolonged Quantitative Easing
Easy come, easy go! The President of the European Central Bank (ECB), Mario Draghi, has challenged the German position on quantitative easing (QE). Draghi says he does not see any sign that the current low interest rates are shifting investment earnings from the poorer—or more indebted countries—to the more “virtuous” ones. Draghi’s view suggests the EU will push for further QE, keeping downward pressure on interest rates and the euro.
Indeed, Draghi has offered a determined defense of quantitative easing policies to the German Institute for Economic Research (DIW). Draghi was addressing, and rejecting, German claims that the ECB’s policy was enriching weak and indebted countries such as Greece, Portugal, Spain, and Italy at the expense of Germany’s high-savings households. (Source: “Draghi Defends ECB’s Easy-Money Policies,” The Wall Street Journal, October 25, 2016.)
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Draghi used the occasion to warn EU member states that it is up to the individual governments to stimulate growth. In other words, the ECB will continue to follow an “easy money” policy. (Source: Ibid.)
In Draghi’s logic, the current low interest regime is protecting savers and investors by speeding up the growth gap between EU states. Thus, by promoting growth, the expectations are that savings will increase in poorer countries. This would then allow for the ECB to gradually increase rates.
The Germans Complain QE Hurts Their Investment Returns
Why is this important? Simply put, Draghi has stated in no uncertain terms that there won’t be an end to QE in March 2017. The ECB will continue to pursue an expansionary monetary policy. Its goal is to boost inflation to two percent or close to it. This could end up putting more pressure on the U.S. Federal Reserve not to raise its interest rates.
Doing so would risk raising the value of the EUR/USD. The ECB president himself stated that the low rates make European products cheaper abroad. Conversely, having too high a EUR/USD disparity hurts American growth.
Finally, Draghi addressed the concerns that the low euro interest rates are preventing or slowing economic reforms in the individual EU states. Rather, the ECB once again put the blame on the individual governments, which tend to raise taxes and cut investments as the main element of their restructuring. Draghi stressed that this is the last thing Europe needs.
Ultimately, the ECB’s policy is all about reducing unemployment. The only concessions to monetary realists—or hawks, as far as the EU is concerned these days—is that ultra-low interest rates “are not the new normal.” In other words, as soon as any signs of lasting growth emerge, the ECB would be ready and willing to raise rates.
