The president of the European Central Bank has sent a reassuring message to nervous financial markets by making clear that he stands ready to give succor to the ailing euro zone economy through further growth-boosting initiatives.
Mario Draghi told journalists at his monthly press conference on Wednesday that it was “premature” to talk of “any exit strategy” from loose monetary policy, “given the present conditions of output and unemployment.”
Draghi’s comments came two days after official figures showed that euro zone unemployment has reached its highest rate since the currency bloc was founded in 1999, and hours after a disappointingly downbeat sovereign debt auction by Spain — the latest peripheral euro zone nation to fall out of favor in financial markets, as investors wonder whether it is the weakest link in the 17-member bloc. The news was one of the main causes of Wednesday’s sharp falls in stock and commodity markets in Europe and beyond.
His strong signal that the ECB is still prepared to use its firepower to boost the euro zone economy dampens speculation that the Bundesbank, Germany’s central bank, is winning its high-profile battle to impose its hawkish mindset on the ECB.
Since Draghi became the ECB’s president in November, the central bank has twice cut its benchmark interest rate, and twice lent hundreds of billions of euros to banks through special three-year lending programs known as long-term refinancing operations (LTROs). The most recent of these four monetary easing measures was the second LTRO on the final day of February.
Of these four policy moves, it was the ECB’s first LTRO in December that is credited the most by far with easing the sense of panic in euro zone financial markets, which peaked in late 2011. Draghi has said that the two LTROs prevented “a major, major credit crunch”, and many analysts agree with him — while attaching more significance to the December operation than the February follow-up.
Draghi’s Wednesday comments indicate that the ECB’s most likely response to a renewed crisis in the euro zone is to use unconventional measures along similar lines to the LTRO, rather than to cut its benchmark rate.
Speaking minutes after the ECB Governing Council decided at its monthly meeting to leave the benchmark rate unchanged at 1 percent for the fourth consecutive month, he said that the ECB had not even discussed either cutting or raising the rate. Moreover, he robustly dismissed fears that euro zone banks have become excessively reliant on ECB cash as a result of the LTROs, saying, “We do not see any sign that banks are addicted to the ECB funding tenders.”
Many economists argue that central banks’ conventional monetary policy — raising or cutting their benchmark rates — has become increasingly irrelevant in many economies in the wake of the 2008 credit crunch because the transmission mechanism by which central bank rates affect the broader economy has in some respects broken down. Euro zone government bond yields were an essential part of that transmission before the credit crunch because they ran in fairly consistent parallel to the ECB’s benchmark rate. However, they currently follow a radically different path to the ECB rate because they mainly reflect assessments of the creditworthiness of different debtor nations.
Draghi’s gloomy assessment of both output and unemployment in the currency union follows two sobering pieces of economic news published this week. Wednesday’s revised survey of euro zone purchasing managers by Markit Economics suggests that the euro zone returned to recession in the first quarter of this year. Monday’s unemployment numbers from Eurostat, the EU’s statistical arm, revealed a rise of 162,000 to 17.1 million in February — 10.8 percent of the workforce. In Spain, whose recent economic and fiscal weakness has rattled financial markets across the world, unemployment is 23.6 percent. Spain’s youth unemployment — people under 25 — rose above 50 percent in February.
Draghi raised concerns about joblessness among young people on Wednesday, saying that countries with particularly high rates of youth unemployment “need to have a reform of the labor market.”
Spain’s aggressive and ongoing deregulation of its employment market was one of the main factors that provoked the country’s March general strike, which brought large parts of the Spanish economy to a halt.
The Eurofirst 300 index of euro zone equities slumped by 2.0 percent to 1,051 on Wednesday. The yield on benchmark Spanish 10-year bonds leapt 24 basis points to 5.69 percent.
