Sechs weeks Mario Draghi is officially still in office. But the actual farewell performance of the outgoing president of the European Central Bank (ECB) will take place this week. Once again, the Council will launch a new monetary policy package, which will probably be the last in Draghi's term.
The upcoming session will be something like the big Draghi finale. A final in which no less than one of the major questions of faith in monetary policy is concerned: how much power does a central bank still have if it has already eased its monetary policy extremely?
If it goes to Draghi, monetary policy can still do something in its extremely relaxed form. The ECB President is confident that even lower interest rates and more bond purchases will make a difference, giving particular impetus to years of stalling inflation.
Last but not least, the financial markets are hoping for a major boost from the monetary authorities, after Draghi raised expectations only at the central bank meeting in Sintra and then at the most recent ECB meeting in July. A further reduction of the deposit rate for banks by 0.1 to 0.2 percentage points and the resumption of the bond purchase program in the volume of 20 to 30 billion euros per month are priced in. Should Draghi fail to deliver now, the euro could shoot up and, in tow, the long-term returns on European bonds. Both would be an additional burden for the shaky euro economy.
Many are opposed to pumping even more billions into the market
But there are also critical voices in the Council opposing Draghi's expectations management. Above all, Bundesbank President Jens Weidmann, who sees no need for a new bond-buying program. But Klaas Knot of the Dutch central bank, Francois Villeroy de Galhau of the Banque de France and the new Austrian central bank chief Robert Holzmann have recently expressed extremely reluctant to pump more billions into the markets.
The economic situation is not so disastrous that it is necessary to launch such a package of measures. In addition, it would be disproportionate to pump billions into the market, perhaps to raise the inflation rate by a tenth of a percentage point. Especially since the balance sheet of the ECB is already at 4.7 trillion euros and could then jump over the magic mark of five trillion in the future.
It is the central question in this debate: how much does the Federal Reserve do in a world of negative interest rates? And if the actions of the central bankers have an effect – is it the desired one? Or do not the harmful side effects predominate in the end?
A weak euro also has disadvantages
The ideal monetary policy would keep the euro rate in check, help the ailing banks and leave some scope for further monetary and fiscal policy measures should the economy continue to weaken. Significantly lower interest rates would probably weaken the euro. In turn, a fresh start to the bond-buying program could give euro-zone governments even more air for more debt-financed spending.
But this policy has its price. The low exchange rate leads to distortions of competition and, in the long run, to falling productivity. There is little incentive for companies to be more efficient in this environment. The extremely favorable financing conditions also mean that companies survive that could no longer hold their own in normal circumstances. Experts speak of "zombiefication".
On the other hand, the states are encouraged to make further debts. To make matters worse, there are no longer enough bonds from some nations that the ECB could buy. Here, in case of doubt, the rules would have to be changed in order to restart a high-speed purchase program. It would also be conceivable that the monetary watchdogs expand their buying universe and instead of using government bonds on debt securities of companies or even banks.
Some experts expect the ECB to buy stocks sooner or later. The Governing Council must weigh here between the many options. And there is not only the question of faith among the 25 members a strong weight. Draghi's role in the panel also plays into the decision. How much debate does the president allow? And how much weight do the members attach to the arguments of the advocates and opponents of further action?
The decision is also of great importance, because Draghi may present his successor Christine Lagarde with completed facts. Depending on how the decision in the Council fails. If the monetary authorities are indeed to decide on a larger package of measures, the scope for Draghi's successor, which starts in Frankfurt at the beginning of November, is likely to wane. This also applies in the event that the ECB extends its monetary policy outlook and excludes higher interest rates by the end of 2020. So far, the promise is that interest rates will remain at their current level of minus 0.4 percent or below by mid-2020. "The meeting will be one of the hardest predictable of the past few years," says Marcel Alexandrovich, economist at Jefferies. "There is no question that the ECB will further relax. But what concrete measures to get the placet of the council members, is anything but safe. "
Carsten Brzeski, chief economist at ING Germany, draws parallels between Draghi and stories about superheroes on the verge of retirement. He has therefore overwritten his recent analysis "Worries of an aging superhero". In it he outlines which script he expects for the upcoming ECB meeting. His conclusion: "The last showdown between Mario Draghi and the Falcons should end with a monetary policy fireworks."
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