Draghi Is Still Influencing Euro Inflation, Commerzbank Says

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Nearly two years after Mario Draghi left Frankfurt, the former European Central Bank president is still influencing inflation in the euro region through his role as Italian prime minister, according to Commerzbank AG Chief Economist Joerg Kraemer.

“If he were to push through the urgently needed reforms and get his home country back on its feet economically, the ECB would no longer feel pressured to prop up Italy,” the Frankfurt-based economist wrote on Monday in a report that was based on an article for the FAZ newspaper.  

With the success of his economic overhaul looking “questionable,” Italy is likely to remain hooked on ultra-low borrowing costs, Kraemer argued. That will force the ECB to keep monetary policy loose, he said, risking that faster inflation eventually becomes entrenched.

“Italy will remain dependent on help from the ECB, which will ensure low government financing costs with bond purchases and negative key interest rates,” Kraemer said, concluding that Draghi’s “actions are still influencing inflation.” 

The Frankfurt-based institution led by Christine Lagarde last week moderately reduced the pace of emergency bond-buying to reflect a solidifying recovery in the euro region. Officials also revised up their inflation outlook, but they argue that it’s too soon to tell whether temporary price spikes will spill over to longer-term pressures.

While headline inflation in Italy is forecast to average only 1.5% this year, according to a Bloomberg survey, in Germany, it is seen averaging 2.9%. Alarm over inflation has featured in the country’s media, concerns that ECB Executive Board member Isabel Schnabel separately sought to address in a speech released on Monday. 

“The ECB determines monetary policy not only for Germany, but for the whole currency area,” she said. “While core inflation is now rising in Germany, it remains negative in other countries, such as Greece.”

©2021 Bloomberg L.P.