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Mario Draghi willing to do “what it should” and to do so quickly

Mario Draghi has virtually left no doubt this Friday, November 20 during a speech to the European Banking Congress in Frankfurt at the next monetary policy meeting on 3 December, the ECB more muscled its monetary easing. The president of the Central Bank warned that “the full range of available instruments” would be, in this case, study.

Mario Draghi, after shooting a flattering assessment of the first months of his public asset purchase policy (also known as QE), acknowledged, however, that the goal was far from being reached. “The return on the path of real growth has not yet reflected on the path of inflation is still well short of our goal,” said the president of the ECB. He sees, in addition, three reasons to intervene.

The first is the risk associated with the weakening of global dynamics. “Global growth this year will be the lowest since 2009,” said Draghi. Second reason: the weak European recovery. Since the end of the recession in 2013, the quarterly growth in the euro area did not exceed 0.4%. In the third quarter 2015, it was still 0.3%. Third reason: the recovery is historically slow in view of past experiences of recession. These three elements are widely known, but probably never Draghi had presented them with such clarity.

This development is all the more remarkable that the President of the ECB does not just pull the alarm on inflation itself, he worries about underlying inflation, while several observers wanted reassurance that this measure in October rose above 1% (1.1%) for the first time in two years. This level is clearly too low for Mario Draghi now believes that action is needed on inflation in services in order to restart the growth of nominal wages only real way to boost the inflation outlook. This message is very strong and it cancels the usual speech that had a perspective the low inflation due to lower energy prices. This time, Mario Draghi said that the rise of the “normal” rate due to the base effect of prices of raw materials will not do it. That is, it slightly changes in the facts the “compass” of the ECB. Trichet used to say that the ECB had “a needle in his compass”: the famous 2%. Mario Draghi wants thinner and inflation becomes a key element of the compass, and wage growth.

Faced with this situation, Mario Draghi promised that the Governing Council of the ECB would “assess in detail the strength and persistence of the factors that slow the return to inflation of 2%. “He added that it” will do what it needs to quickly “to fulfill its mission. Two actions were discussed: “adjust” QE “in size, its composition, and its duration” and reduce the deposition rate of the ECB, already negative at -0.2% “to increase the velocity of circulation bank reserves. “These words, therefore, leave no doubt about the will of action of the President of the ECB. They singularly contrast with those of the president of the Bundesbank, Jens Weidmann, who said the same Friday, November 20 at the same meeting that “there is no reason to paint black the economic situation. “But now, Mario Draghi knows how to handle the opposition of the Bundesbank: prepare the markets to make the desired movement inevitable, except to provoke a violent correction.

The question is whether Draghi will act on the tables or on one of the two on 3 December. The extension of six months of QE is likely, which will strengthen in size mechanically. Will he additionally increase the pace of repurchase currently set at 60 billion? It’s possible, but the shares to be redeemed could be increasingly rare. Will he then expand the repurchased shares, including the private sector? Yes, but the “neutrality” of the market may become illusory, and above all this corporate bond market hardly for SMEs. QE is a useful tool, but it is an incomplete tool and cannot solve all problems. Without investment prospects, its effect is necessarily low.

As for the decline in deposit rates, it seems that the ECB is now convinced she can go further than the current level. The Danish and Swiss experience, where the rate is – 0.75% without causing negative side effects has probably convinced. But the more you sink into negative territory, we take more risks. There are at least two: the negative rates will weigh on a financial sector already somewhat stout and if banks “postpone” on saving these negative rates, there is a danger that economic agents prefer in fine money liquid bank deposits.

We must, therefore, proceed with caution, but the ECB considers that a further decline in deposit rates will encourage banks to lend more to not maintain reserves that will be “taxed” more heavily. As of November 13, 188 billion euros were still deposited by banks with the ECB under the deposit facility. Frankfurt This suggests that we must discourage institutions to keep these deposits. But beware: even if banks reduce these deposits, this money will not go immediately, fully and necessarily in the real economy.

Still, these two measures will impact on the exchange rate, even as the Fed seems to be preparing to raise rates. The euro is expected to decline, but the previous decline shows that the impact of foreign exchange, it is not negligible is neither sufficient nor durable enough.

Despite his determination, Mario Draghi can only fight against the three factors that he has identified. Missing from the eurozone a mechanism to restore outlook and activity. The Ricardian vision rather naive considering that fiscal consolidation would restore economic agents faith in the future has been undermined here: the cumulative deficit of the euro area has fallen sharply, and growth knows no noticeable rebound and sufficient. average growth expectations of economists over 5 years for the euro area are only 1.4%!

It is now necessary to act more directly if the ECB will remain in the maze. This was recognized Monday, November 16th Vice President of the ECB Vitor Constancio has called to be more flexible in the implementation of the Stability Pact and to revive the investment plan of Jean-Claude Juncker. In short, the ECB, even if it shows prudent course, does not hide more: QE must be accompanied to succeed a Keynesian policy stimulus in the euro area. We are still far away.