(Bloomberg Opinion) -- Only last week President Donald Trump was blasting Mario Draghi, the European Central Bank chief, for flirting with more economic stimulus and weakening the euro. The outburst seemed like another fairly typical tweet of presidential rage. It turns out it was jealousy.
On Wednesday, Trump said the U.S. should have Draghi “instead of our Fed person.” This is of course more an expression of his frustration with Jerome Powell, chairman of the U.S. Federal Reserve – whom Trump has thought of removing – than any genuine love for Draghi.
But even if he could hire the urbane Italian to run the Fed, which would be very unlikely for a non-U.S. citizen, the irascible president would soon regret his choice, as he has with so many appointees. The ECB president would cause Trump trouble on at least three fronts: Monetary policy, fiscal policy, and central bank independence.
Trump’s newfound affection for Draghi comes from a very rudimentary understanding (to put it politely) of the economy and central banking. The president has berated the Fed’s decisions to raise interest rates, blaming it for the strong dollar. In Trump’s mind this contrasts with the ECB’s more accommodating stance. Last week Draghi said the bank stood ready to cut rates more deeply into negative territory and to maybe restart net asset purchases if Europe’s economy didn’t improve. To the U.S. president, Draghi sounds like a dove, while Powell is an irritating hawk.
Yet the ECB president is nowhere near as dovish as Trump imagines. The euro zone and the Americans have different monetary policy stances because their economies are in very different shape. In the U.S., unemployment is below 4% and core inflation is hovering around 2%. Euro-area joblessness, by contrast, has only recently fallen below 8% and measures of labor market slack suggest there is substantial underemployment. Meanwhile, the bloc’s core inflation was less than 1% in May, substantially lower than the ECB’s target of below but close to 2%. The case is unequivocal for having a looser monetary policy in the euro zone than in the U.S.
Like Powell, Draghi has been criticized for withdrawing monetary stimulus too soon. The ECB chose to terminate net asset purchases at the end of last year even though inflation was still below the central bank’s target. While Draghi said the central bank could afford to do this since the monetary union had escaped the risk of outright deflation, not everyone agreed. That he chose to stop so-called Quantitative Easing anyway suggests his attitude to monetary policy is more nuanced than Trump believes.
Neither does Draghi show any patience for governments that expand their budget deficits during a recovery. That’s exactly what Trump did with his tax reforms, which came when the U.S. economy was already near full employment. Draghi has repeatedly fought the cause of fiscal responsibility, particularly in high-debt countries.
While the ECB chief has changed tone now – saying that fiscal policy may need to play a bigger role in a crisis – this message has come with careful caveats. For example, he believes countries should rebuild fiscal space in the good times so they can cut taxes and increase spending during a recession. This is not the champion of perennial stimulus of whom Trump is dreaming.
Finally, Draghi is a staunch defender of central bank independence. The ECB is more autonomous than most other central banks because its objectives are enshrined in European treaties. Draghi is not shy of lambasting European politicians when they try to intrude. When Wolfgang Schaeuble, then Germany’s finance minister, accused the ECB of stoking populism in Germany with its accommodating monetary policy, Draghi was scathing. “We have a mandate to pursue price stability for the whole of the euro zone, not only for Germany,” he said, adding that “we obey the law, not the politicians, because we are independent.” Trump should perhaps be grateful for Powell’s more gentle rebuttals.
Trump is right to praise Draghi, but he does so for the wrong reasons. The president would like a weak Fed, which does what he wants. Conversely, Draghi has strengthened the ECB’s self-reliance. Not an ideal match.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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