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ECB warns trade wars biggest risk to eurozone

The economic outlook for the eurozone is glowing, but politics and trade are risk factors
AFP

Frankfurt am Main (AFP) – The European Central Bank on Thursday signalled greater confidence in the eurozone economy and in the chances of hitting its own elusive inflation goal, but warned that protectionist threats from the United States risked undermining the good times.

Higher forecast growth of 2.4 percent this year and reduced uncertainty mean the bank no longer needs to explicitly say it will ratchet up bond-buying if the global outlook becomes less favourable, ECB President Mario Draghi said.

That element of “forward guidance” on policy dated back to December 2016, when fears of a slide into deflation were much greater — “really unlikely contingencies now,” Draghi said.

But he stressed that the bank continues to buy 30 billion euros ($37.1 billion) per month of corporate and government bonds, to reinvest proceeds from its 2.3-trillion-euro stock of securities, and to hold interest rates at historic lows.

“They are all important” pillars of the ECB’s support to the economy, Draghi said.

Reassurance from the Italian during his press conference appeared to smooth out an initial spike in the euro seen after the policy change.

Meanwhile, Draghi said the immediate impact of President Donald Trump’s threatened tariffs on imports of steel, aluminium and cars to the US “is not going to be big”.

But business confidence could be sapped as the European Union is already threatening retaliatory levies on American motorbikes, peanut butter and orange juice.

“If it’s a negative effect on confidence, then it’s going to be negative on both inflation and output,” Draghi said.

“Disputes should be discussed and resolved in a multilateral framework,” rather than tit-for-tat exchanges, he added.

“There is a certain worry or concern about the state of international relations, because if you put tariffs against what are your allies, one wonders who the enemies are.”

Draghi’s rebuke to the Trump administration over unilateral trade moves follows a January telling-off over apparent attempts to talk the dollar down.

A lower dollar could slow growth in the eurozone by slashing exports and hit inflation directly by making imports cheaper.

“Current US economic policies are regarded as the biggest risk for the eurozone economy,” economist Carsten Brzeski of ING Diba bank noted.

– Tip-toeing to the exit –

Observers have long seen the deletion of the so-called “easing bias” towards more bond purchases if needed as the first step towards ending the scheme. 

But “recent turmoil in financial markets, the stronger euro and disappointingly weak inflation in the euro area don’t bode well for a swift end,” economist Marcel Fratzscher of Berlin-based think-tank DIW said.

Along with historic low interest rates, the “quantitative easing” bond-buying scheme is designed to stoke economic growth by pumping cash through the financial system, helping boost inflation to the ECB’s target of just below 2.0 percent — seen as most favourable for long-term growth.

The ECB has bought more than 2.3 trillion euros of government and corporate debt since launching the stimulus programme.

While eurozone GDP expansion surged to 2.3 percent last year, price growth has not picked up in step.

The March forecasts slightly downgraded inflation expectations for next year, to just 1.4 percent, with even 2020’s prediction at 1.7 percent still slightly short of the ECB goal.

Nevertheless, so-called “hawks” on the governing council have grown increasingly vocal as growth has picked up, arguing bond-buying is no longer needed to ensure inflation returns to target.

“Today’s communication change should in our view be seen as a conciliatory move to please both the ECB’s hawks and doves,” who favour maintaining bond-buying until the price growth goal is more clearly within reach, Brzeski said.

– Italian conundrum –

Draghi played down fears that an Italian election Sunday that swept eurosceptic populist parties to record results could threaten stability in the eurozone.

Market reactions to the debacle for traditional political forces had been muted, he pointed out.

But “protracted instability may undermine confidence, and anything that undermines confidence can have a negative effect on growth and inflation,” he reiterated.

The parties enjoying the biggest gains made pricey promises of lower taxes and higher social benefits — in a country already burdened by debts exceeding 130 percent of GDP.

A longstanding ECB call for governments to build up cash buffers while the sun shines is “particularly important in countries where government debt remains high,” Draghi said.

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