conomists hail birth of ‘Draghinomics’
Eurozone officials attending the Ambrosetti forum over the weekend welcomed the European Central Bank’s moves to cut interest rates and signal forthcoming purchases of asset-backed securities, with some private-sector economists suggesting this could herald a new policy mix.
Even though the ECB’s long-term forecasts of moderate recovery remain unchanged, the bank’s board members have grown increasingly worried about the recent downward pressure on prices and the softening of consumer confidence. Its latest moves are designed to stave off deflation and jolt the sluggish eurozone economy back to life.
Nouriel Roubini, professor of economics at New York University, said ECB president Mario Draghi’s remarks at the Jackson Hole meeting of central bankers signalled an important evolution of thinking. Mr Draghi said at the symposium that monetary policy should be supported by increased spending by countries with strong fiscal positions and structural reforms in economies such as France and Italy. Mr Roubini labelled the emerging policy mix “Draghinomics” because of its similarity to the three arrows of Abenomics in Japan.
“Abenomics has three arrows: monetary and fiscal easing and structural reforms. The eurozone is in near deflation and the recovery is not happening. Monetary and fiscal easing cannot resolve the problem on their own. The ECB has recognised that structural and supply-side reforms are fundamental,” Mr Roubini told the Financial Times.
Jyrki Katainen, the European Commission’s vice-president for economic and monetary affairs, said that member states needed to stick to the fiscal discipline that had helped stabilise the currency bloc. But in an interview with the Financial Times, he suggested there was some “fiscal space” in the eurozone as a whole to increase public investment spending. The commission would put renewed emphasis on structural reforms.
“I very much agree with Mario Draghi and what he said that there is a huge need for pursuing structural reforms to improve competitiveness in Europe,” Mr Katainen said, highlighting labour and product market reforms, pension reforms, and liberalising some professional services in various countries. He also said that public spending across the eurozone should be adapted to encourage investment.
One other senior eurozone official attending the Italian forum which gathers together policy makers, business people and academics said: “Structural reforms are key. Those countries that have made these efforts are performing better: Ireland, Spain and Portugal. Italy and France should think a little bit about this.”
Members of the ECB’s governing council applauded Mr Draghi’s performance to the press on Thursday, saying his remarks accurately characterised the debate between policy makers. It was during the press conference following the rate cut announcement that the ECB president acknowledged the council was split for the first time since last November.
Though there was a “comfortable majority” in favour, some members of the council voiced concern that a programme of asset-backed security purchases could lead to the ECB taking too much credit risk away from the banks and on to the central bank’s balance sheet. Arguments for waiting for more data met with resistance from Mr Draghi, who believed urgent action was needed. Others called on the ECB president to go a step further and embark on mass government bond buying.
“Some of our governing council members were in favour of doing more than I have just presented, and some were in favour of doing less,” Mr Draghi said last week, adding that the plan announced “strikes the middle of the road”. Jens Weidmann, the Bundesbank’s president, was one member of the council who wanted less than what was unveiled on Thursday.
A figure for the size of the programme was mooted, but most felt it too early to give an exact figure for the value of assets the ECB was likely to buy. Reuters reported before the decision that the central bank was mulling a plan to buy €500bn of ABS and covered bonds.
Mr Draghi said instead that the combination of purchases and its forthcoming auctions of cheap loans would boost the ECB’s balance sheet by up to €1tn to levels not seen since the start of 2012.
The ECB cut rates to boost the take-up of its first offer of cheap, fixed-rate four year loans – set for the middle of this month. The cost of the loans drawn from the Targeted Longer-Term Refinancing Operation are tied to the ECB’s benchmark interest rates. Policy makers hope that what Mr Draghi promised was the final cut in rates will encourage treasurers to bid for funds in September instead of waiting until the end of this year or 2015.
Jean-Claude Trichet, the former president of the ECB, said it might be possible to boost demand by increasing infrastructure spending across the eurozone. Jean-Claude Juncker, the incoming president of the European Commission, has proposed a €300bn public-private investment programme. “These ideas of having some kind of big investment programme that would be financed by traditional means, by private-public partnership, and if necessary by project bonds do not seem to me aberrant in the present situation. Hundreds of billions [of euros] have been mentioned. We’ll see what happens,” he said in a video interview.