A day after Mario Draghi presented a sobering economic outlook for the eurozone, the nervousness coursing through the ECB was underscored by a fellow policymaker.
There is serious uncertainty at the moment because you don’t know exactly whether this is a pothole on the road or a landslide,” said Ewald Nowotny, the head of Austria’s central bank and member of the ECB’s policy-setting Governing Council, of which Draghi is president.
Nowotny was referring to the new threats to the world and eurozone economies from China’s slowdown and market turmoil. As a result, there is increased pressure on the ECB to bolster its money-printing quantitative easing more than planned.
Benchmarks used to measure the eurozone economy, whether on lending or economic output are modest, despite a €60bn a month ECB scheme to buy chiefly government bonds.
As oil prices tumble, price inflation, one of the key ways of taking the economy’s pulse, has fallen to 0.2%. Draghi has warned it could yet dip into the red — a dangerzone for the ECB whose goal it is to keep it nudging 2%. To make matters worse, China is in trouble.
Draghi said yesterday that he was seeking to find out more about China’s problems at a meeting of the Group of 20 leading global economies, whose finance ministers and central bankers gather in the Turkish capital of Ankara on Friday and Saturday.
“We have to see whether these effects are transitory or permanent,” Draghi told reporters. “Then we will decide whether to do more.”
‘More’ would be to increase asset buying. The ECB has already made some changes, adjusting the limits on the amount of a bond issue it can buy.
That has been taken by some investors to mean enhanced quantitative easing is on the way — possibly, they hope, by raising the current €60bn a month spend to, say, €80bn.
A senior delegate at the G20 told Reuters that the group is likely to send a “reassuring” message on China and will not single out Beijing for criticism over its recent market turmoil.
But brushing off China’s difficulties will not be that easy. The gloomy economic-forecast downgrades at the ECB on Thursday were made before the Chinese market meltdown.
Germany, the economic anchor of the eurozone, and its ultra conservative Bundesbank will be hostile to any extension of money printing beyond its planned end date of September 2016 — another possibility raised by Draghi this week.
Jens Weidmann, the head of the Bundesbank, played down the latest market turbulence in China yesterday.
“I don’t see a lasting danger for the global economy”, he said, cautioning, as often before, of the “limits of what a very expansive monetary policy can achieve”.
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