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Why Strong Growth Is a Headache for the European Central Bank Draghi, Chief of Europe’s Central Bank, Chides Mnuchin Over Dollar Comments
(about 5 hours later)
FRANKFURT — Mario Draghi, the president of the European Central Bank, has what might be called a happy problem. FRANKFURT — Mario Draghi, the president of the European Central Bank, directed unusually sharp criticism at Steven Mnuchin, the United States Treasury secretary, on Thursday, effectively accusing Mr. Mnuchin of violating agreements among nations against starting currency wars.
The eurozone economy is performing better than anyone expected a few months ago. That’s reason to celebrate. But the vibrant growth is also upending assumptions about when the European Central Bank will need to act to keep inflation under control. Mr. Draghi, speaking at a news conference here, said he objected to “the use of language in discussing exchange rate developments that doesn’t reflect the terms of reference that have been agreed.” He then quoted from an agreement reached in Washington in October under which countries promised to “refrain from competitive devaluations.”
For Mr. Draghi, that’s an issue. Mr. Draghi did not mention Mr. Mnuchin by name, but he was clearly referring to the Treasury secretary’s remarks on Wednesday at a World Economic Forum panel in Davos, Switzerland, that a weaker dollar was good for United States trade. The comment was interpreted as an effort to talk down the dollar, which would breach the international nonaggression pact on currency rates.
Managing investor expectations and avoiding undue market turmoil are among a central bank president’s most important tasks. Fast-changing economic data, along with mixed messages from members of the European Central Bank’s Governing Council, mean that the remarks Mr. Draghi gave in December — saying the central bank would continue stimulus measures at least through September and could even step them up after that — already seem obsolete. On Thursday, Mr. Mnuchin told reporters in Davos that his comment had been misunderstood.
He will have a chance to update his message on Thursday. Mr. Draghi will hold a news conference after a meeting of the Governing Council, where his task will be to calm the cacophony of speculation and provide a measure of certainty about the bank’s intentions — all while keeping his options open in case circumstances change. “I thought it was actually balanced and consistent with what I’ve said before,” he said, “which is we’re not concerned with where the dollar is in the short term. It’s a very, very liquid market and we believe in free currencies. And that there’s both advantages and disadvantages of where the dollar is in the short term.”
The central bank signaled no changes in policy in a statement issued before the news conference. The bank reiterated that it would continue stimulus measures intended to hold down market interest rates at least through September. And it left open the possibility of increasing the stimulus if conditions worsen. Central bankers usually refrain from rhetorical fisticuffs with government officials, but Mr. Mnuchin’s initial remark arrived at a sensitive time for the eurozone.
Investors and analysts will be listening closely for any changes in Mr. Draghi’s tone or language that hint at an end to the stimulus program, known as quantitative easing. Europe’s economy is performing better than anyone had expected it would be just a few months ago. But the growth has brought some unwelcome side effects. In particular, the euro has reached a three-year high against the dollar as investors anticipate the European Central Bank dialing back its economic stimulus efforts sooner than previously expected, which would mean higher interest on the euro.
Here are some key phrases to listen for, adapted from a report this week by Carsten Brzeski, economist at ING Bank in Frankfurt. A strong euro makes products manufactured in the 19-country eurozone more expensive abroad, which could hurt exports and ultimately create a drag on economic growth.
Signals suggesting the central bank is in no hurry to put the brakes on the eurozone economy: Mr. Draghi has already struggled to contain investor expectations about when the central bank would end the money-printing program known as quantitative easing. He was obviously unhappy that a top official in the Trump administration was inciting volatility in currency markets.
■ Inflation is expected to rise gradually. Mr. Draghi portrayed Mr. Mnuchin’s comments as part of a broader deterioration in international etiquette. At a meeting of the central bank’s Governing Council that preceded the news conference, Mr. Draghi said, “Several members expressed concern and this concern was broader than simply the exchange rate. It was about the overall status of international relations right now.”
■ Risks to growth are broadly balanced. The central bank signaled no changes in policy on Thursday, reiterating that it would continue its stimulus program at least through September in order to hold down market interest rates and to nudge inflation toward the official target of 2 percent. And policymakers left open the possibility of increasing the stimulus efforts if conditions worsened.
■ The increasing strength of the euro presents a risk to growth. A statement by the Governing Council included several phrases that would normally be taken as indications that the central bank was in no hurry to put the brakes on the growth of the eurozone economy. Among the relevant phrases:
■ A majority on the Governing Council wants quantitative easing to remain open-ended. •“Domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.”
Signals indicating the central bank may end its stimulus program after September: •“The recent volatility in the exchange rate represents a source of uncertainty.”
■ Confidence is growing that inflation is getting close to the official target of 2 percent. •“An ample degree of monetary stimulus remains necessary.”
■ The eurozone recovery is improving. Still, the euro rose against the dollar as traders effectively ignored attempts to convince them that there had been no change in the bank’s stance.
■ The strength of the euro reflects economic fundamentals. “Without saying anything new,” Mr. Draghi moved the markets, Carsten Brzeski, an analyst at ING Bank in Frankfurt, said in a note to clients. “But probably not in the intended direction.”
■ A significant number of Governing Council members no longer favor open-ended quantitative easing. Investors and analysts had been even more keenly attuned than usual on Thursday to any changes in Mr. Draghi’s tone or language that might hint at an end to the stimulus program. Comments by some Governing Council members suggested that a growing faction favored an abrupt end to stimulus after September, rather than a gradual withdrawal.
Since December, indicators of eurozone growth have steadily gotten stronger. Surveys of business and consumer confidence find them at their highest levels in more than a decade. Unemployment, at 8.7 percent, is at its lowest level since early 2009. The leading survey of business confidence in Germany is at a record high, according to data published on Thursday. Since December, the indicators of eurozone growth have steadily gotten stronger. Surveys of business and consumer confidence find both at their highest levels in more than a decade. Unemployment, at 8.7 percent, is at its lowest level since early 2009. The leading survey of business confidence in Germany is at a record high, according to data published on Thursday.
Now expectations are rising that the quantitative easing program, in which the European Central Bank creates new money and uses it to buy government and corporate bonds, will end after September. That would set the stage for the bank to begin raising its key interest rate, which is currently at zero, sometime in 2019. As a result, expectations have risen that the quantitative easing program, in which the central bank creates new money and uses it to buy government and corporate bonds, will end after September. Such a move would set the stage for the bank to begin raising its key interest rate, currently at zero, sometime in 2019.
These changing expectations are bringing some unwelcome side effects. In particular, the euro has gained against the dollar, as investors reckon they’ll be able to earn higher interest on the euro. But a strong euro also makes products manufactured in the 19-country eurozone more expensive abroad, which could hurt exports and ultimately create a drag on economic growth. A majority of the 25-member Governing Council probably lean toward a gradual end to quantitative easing. But some members who are not usually considered hard-liners on the issue of inflation have lately questioned whether it made sense to prolong the stimulus program.
Most analysts expect Mr. Draghi to send a strong signal on Thursday that the European Central Bank will keep pumping money into the economy until there are unmistakable signs that inflation is getting close to the official target of below, but close to, 2 percent. But a growing number of Governing Council members have been agitating for a signal that the days of quantitative easing are numbered. Among those doing the questioning is Benoît Coeuré, one of six members of the central bank’s executive board, which oversees its operations. (The other council’s other 19 members are the leaders of the national central banks in the eurozone.) Mr. Coeuré has generally been seen as a proponent of quantitative easing.
A majority on the 25-member Governing Council probably leans toward a gradual end to quantitative easing. But some members who are not usually considered hard-liners when it comes to inflation have lately been questioning whether it makes sense to prolong central bank stimulus. Recently, though, he has sounded very bullish about the eurozone economy, a sign that he might join those who think the bond-buying should come to an end. As one of the Governing Council’s most influential members, Mr. Coeuré could help tip the balance of power.
Among them is Benoît Coeuré, one of six members of the Executive Board of the central bank, which oversees its operations. (The other 19 members of the Governing Council are the heads of the national central banks in the eurozone.) Mr. Coeuré has generally been seen as a proponent of quantitative easing. “The current economic expansion in the euro area is stronger than it has been for a decade,” he said in Bangkok last month, “and broader than for two decades.”
Recently, though, Mr. Coeuré has sounded very bullish about the eurozone economy — a sign he may join those who think the bond-buying should be coming to an end. As one of the Governing Council’s most influential members, he could help tip the balance of power. Mr. Draghi, in effect, said on Thursday the appearance of increasing disagreement among Governing Council members was not significant.
“The current economic expansion in the euro area is stronger than it has been for a decade,” Mr. Coeuré said in Bangkok last month, “and broader than for two decades.” “I don’t think the differences between the various members of the Governing Council are as substantive as they were on other occasions,” he said. “We are not talking about deep existential differences.”