Mario Draghi, You Have a Serious Problem
(Bloomberg Opinion) -- The European Central Bank needs to wake up. Of all the major central banks, it’s the one that really should be reacting to an evident economic slowdown in its backyard. There’s a danger this might turn into a recession, Europe’s third in a decade.
But being proactive is not in its nature. Its Achilles’ heel is running monetary policy via committee for 19 countries with contradictory needs. Little is expected from its next meeting on January 24th, as this will not include one of its quarterly economic reviews, and it’s too soon to judge any effect from its decision to halt its Quantitative Easing program. Nevertheless, it needs to show that it’s alive to the risk of its 1.7 percent growth forecast for 2019 not panning out.
ECB president Mario Draghi should follow the example of the U.S. Federal Reserve’s Jay Powell. Even though the U.S. is still growing quickly, Powell has listened to the markets and reined back on rate hikes. The Fed’s biggest dove, Minneapolis president Neel Kashkari, and hawk, Kansas City’s Esther George, are in unison on the need to pause.
Such nifty reactions aren’t evident at the ECB. Four of its policy-makers have repeated the case for rate hikes this year. Only Draghi seems alive to the impending risks. Yet even his acknowledgment of a slowdown was swiftly followed by an assertion that the euro area isn’t headed for recession. That’s a bold prediction.
The currency union’s big four economies have all hit a wall. Germany’s growth is at its lowest point since 2013 as the fallout from the Volkswagen AG’s dieselgate scandal has pushed it into an industrial recession. Italian growth has stalled completely, and both France and Spain are seeing surprisingly abrupt slowdowns. These could easily end up precipitating a wider euro-area slump. The ECB’s timing in turning off the stimulus taps looks unfortunate. It could end up being disastrous.
While Draghi always repeats the mantra that the ECB can resume QE if needed, that’s little more than a platitude. The hawks on the governing council would be resolutely opposed, having fought so hard to bring it to an end. However, a more calibrated version of QE is available – that is, one that can be directed to countries that need it, rather than to everybody. It’s called the targeted long-term refinancing operation (or TLTRO for short).
TLTRO is a super-cheap funding vehicle for banks that choose to participate, getting liquidity into the more challenged parts of the EU’s regional banking system. Think Greece and Italy. It’s not without controversy among the economic hawks, given that it potentially does favors to governments who might not be behaving themselves fiscally. But at least loan collateral, of sufficient quality, has to be pledged with the central bank. That excludes the real basket cases.
The TLTRO take-up over multiple operations has already been huge, further ballooning the ECB’s balance sheet in the process. But with Europe’s economic and political situation looking fragile, it could play a crucial part in preventing disaster. Draghi has already highlighted that a new TLTRO has been discussed on the governing council. The ECB should be accelerating its timetable rather than waiting until the EU’s economic fate is already sealed.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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