Upping the Ante—QE2 on its Way from ECB (10/22)     Print Email

By Alexander Privitera Executive Director, European Institute

The latest gathering of the Governing Council (GC) of the European Central Bank (ECB) provided ample ammunition to all those who expect the central bank to expand or extend its program of asset purchases, also known as QE. In his public remarks following the GC meeting President Mario Draghi indicated that a decision could come as early as December. The ECB is shifting from a wait and see approach to a, in Draghi’s own words, “work and assess” mode, as the slowdown of emerging economies is starting to have a negative impact on the euro zone’s exports and risks to the euro zone’s economy are clearly tilted to the downside.

There is no need to stress all the instances in which Draghi’s comments were strikingly dovish (i.e. meaning closer to more stimulus). The initial market reaction, with the euro depreciating sharply against the U.S. dollar and equity markets rallying, demonstrated that investors got the message loud and clear. Barring a sudden improvement in the global economic outlook it is hard to see how Draghi can credibly postpone action much further.

The fact that the FED will hold its December rate setting Federal Open Market Committee (FOMC) almost two weeks after the ECB’s own GC December gathering proves that the ECB is determined to act regardless of the FED’s decisions. Draghi and his colleagues seem to have lost their confidence in the willingness of the Fed to tighten monetary policies in the U.S., regardless of whether the FOMC will announce a first rate hike on December 16 or not. Since the narrative of the “great divergence” rested on the assumption of a significantly tighter monetary policy stance in the US – let’s not forget that it had greatly helped the ECB to achieve its objectives in the first half of the year - it is important for Draghi to find ways to restore it.

But what was striking in this latest press conference of Draghi was his reluctance to embark into a long debate about what countries, and therefore governments need to do in order to enact structural reforms. This was another instance in which Draghi ‘the savior of the euro zone’, felt much more comfortable in his traditional role of a politically independent central banker. Furthermore, Draghi’s comments were not particularly bearish about the Euro zone’s economy at all. While he admitted that risks were growing, he also talked of significant structural reforms that had already been enacted and were supporting many euro area economies, about a sustained, albeit predominantly cyclical recovery, of better financing conditions, of domestic demand driven growth – all things that should make the economy more resilient against outside shocks.

However, he obliquely cited the impact of China’s slowdown on Germany as potentially sizeable, given the country’s exposure to the Chinese market. As to the impact of the Volkswagen emission scandal and the refugee/migrant crisis he said it was still too early to say what that would be. Given the fact that Germany is currently shouldering the biggest burden of the refuges crisis I wonder: is Germany slowly becoming a source of economic uncertainty? If that is the case, any help it could get, even in form of even looser monetary policies, could help it to better absorb the shock. It would be ironic if Germany turned out to need “QE2” more than any other euro zone’s economy currently does.