Mario Draghi Reaches the End of His Fight to Save Euro

(Bloomberg) --

European Central Bank President Mario Draghi will hold his final policy meeting and press conference on Thursday, after eight years of leading the fight to stave off a euro-zone breakup and the threat of deflation.

For all his successes, it’s likely to be a day in which any congratulations are mixed with tough questions about the region’s brittle economy. Draghi will depart on Oct. 31 with his primary mandate of ensuring price stability unfulfilled, and the Governing Council split over his strategy.

His latest burst of stimulus in September means economists don’t expect a rate hike until late 2022, locking in the current expansionary stance until well into incoming President Christine Lagarde’s term. But Draghi won’t escape inquiries on how much more the central bank can do before it runs out of steam, and what governments should do to help.

What Bloomberg’s Economists Say

“Draghi will likely reiterate -- if not intensify -- calls for fiscal policy to play a larger role. He can afford to shout louder and perhaps be more specific about who needs to act now that he’s leaving office. Further details on monetary policy are unlikely to emerge.”

--David Powell and Maeva Cousin. Read their ECB PREVIEW

The policy decision will be announced at 1:45 p.m. in Frankfurt, with Draghi’s briefing 45 minutes later. Here are some of the topics he’s likely to address.

Inflation Miss

Despite unprecedented monetary stimulus, Draghi has fared worse than his two predecessors on inflation, falling well short of the goal of below, but close to, 2%. The rate was 0.8% in September, the lowest in almost three years.

Officials have pledged to pursue record-low interest rates and large-scale asset purchases until price growth is firmly in line with the target, which they don’t expect until after 2021. Investors are trying to judge whether more rate cuts will be needed, and how long quantitative easing can run without the ECB hitting self-imposed limits on how much debt it can buy.

Worrying Outlook

ECB chief economist Philip Lane said last week that the currency bloc is facing a more extended slowdown than previously anticipated amid global trade tensions. Consumer confidence is at the weakest this year, and a survey of purchasing managers showed Thursday that the economy remained close to stagnation at the start of the fourth quarter.

While euro-area officials expect a downgrade to growth forecasts in December, that may not be enough to provoke more action though. Last month’s divisive decision has left little appetite to add to more stimulus any time soon.

Stimulus Controversy

The dispute over September’s decision was extraordinary. A third of the Governing Council opposed restarting QE and some of them vented their frustration publicly, prompting the president to warn that such dissent can undermine the ECB’s credibility.

For the first time, skepticism toward ever-looser monetary policy reached beyond the region’s core. Italy’s Ignazio Visco -- usually a strong supporter -- signaled he would be reluctant to back another rate cut further below zero. His maverick colleague Robert Holzmann of Austria wants a return to positive borrowing costs.

Fiscal Boost

With monetary policy stretched, Draghi has cranked up his call for governments to boost spending, telling an audience in Milan this month that countries such as the U.S. where fiscal support played a bigger role after the financial crisis saw a faster return to price stability. He’ll almost certainly hit that subject again. Whether he’ll be listened to is another question.

Germany is the country best placed to act because of its economic heft and its budget surplus. Yet Bundesbank President Jens Weidmann is skeptical, and the government has been reluctant -- though there are signs it’s warming to the idea.

Data next month should confirm that the nation slipped into a recession. Even if that sparks a fiscal response though, it’s not clear how much the rest of the euro zone would benefit.

Strategy review

Ultimately, many officials have set their sights on a bigger discussion about how the ECB conducts monetary policy. Draghi may be asked about his perspective on the matter, but he’ll have to leave the field to Lagarde, who has already endorsed the idea of a review.

“I’d expect that this Thursday there is really not much to be decided upon,” Moritz Kraemer, chief economic adviser at Acreditus, said on Bloomberg TV. “I think this will be just sort of a lovefest for Mario Draghi to say goodbye.”

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;Yuko Takeo in Frankfurt at ytakeo2@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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