Article / 28 November 2014 at 13:11 GMT

It's now or never, Mr. Draghi

Managing Partner / Spotlight Group
United Kingdom
  • Regional inflation in Eurozone at five-year lows
  • Bündesbank blocking ECB's path to sovereign bond purchases
  • Italian unemployment hits highest level since 1977

By Stephen Pope

It certainly is a “Black Friday” inside the Eurozone, but not in the retailing sense of the word. Regional inflation declined back to September's levels this month, hitting its five-year low of 0.3%. 

This places more pressure on European Central Bank president Mario Draghi to swiftly enact policy measures that will combat the tortuous tumble toward deflation.
EZCPI Source: Eurostat

Food, alcohol and tobacco prices increased by 0.5%. Given that 28% of Eurozone imports are accounted for by oil, fuels and lubricants, it is clear that the slowdown can be partially explained by the substantial decline in oil prices. 

The Eurostat report showed that energy prices fell 2.5% in November from a year earlier. These data, however, do not reflect the deeper decline in crude oil following Opec’s refusal to reduce oil production.

That implies that next week, (Thursday, December 4), Mario Draghi will be caught between the proverbial rock and a hard place as he will have to confirm another round of pessimistic forecasts, tell press that he wants to raise inflation as fast as possible and emphasise that he will use all available tools at his disposal (even though the governing council is far from united on this issue).

Mario Draghi

Deadlock at the ECB puts president Mario Draghi in a difficult position 
before the press. Photo: Hannelore Foerster \ Getty Images

Of concern here is the inertia that seems to exist at the heart of the Eurozone's seeming inability to recognise the scale of, and react to, the problems it faces. It is undeniable that the ECB spent far too long both sitting on its hands and believing its own medium-term economic forecasts without looking at the actual, street-level situation across much of the continent. 

There are increasing signs of deflation throughout the region, just look at consumer prices index data for the top five economies....

... Germany is at 0.6%; France, 0.5%; Italy, 0.2%; Spain, minus 0.5%; and the Netherlands is at 1.1%.

Time gentlemen please

Surely we are now at a point where the Bündesbank (BUBA) cannot keep blocking the path to sovereign bond purchases as the ECB's quantitative easing is stepped up to mimic the actions of the Federal Reserve, the Bank of England and (of course) the Bank of Japan.

A few indecisive policy makers have dropped hints that the ECB governing council meeting next Thursday is not be the appropriate moment to add to the stimulus that is already in place. This week, ECB vice-president Vitor Constancio said that the best moment to "consider new tools" would be in the second quarter of 2015. 

This, of course, would be so the effects of low refinancing, negative deposit rates, targeted long-term refinancing operations plus covered bond and asset-backed securities purchases could be evaluated in a broader sense than is currently possible.

On the other hand, one wonders why, having excited the markets with tough talk about QE last week, the bank would seek to snatch away those very same hopes this week?

I sense that, behind the polite niceties and smiles offered for public consumption, there is one almighty squabble going on right now. In fact, it is likely to be a power play between the ECB and the German Bündesbank. 

Specifically, I sense that Draghi is being cowed by BUBA and the Dutch central bank, as neither nation is keen on sovereign asset purchases (as they are one step too close to central bank state funding).

Jens Weidmann

Bündesbank president Jens Weidmann is a known opponent 
of outright QE: Photo: Chatham House \ Creative Commons

That is why Draghi said yesterday that the bank requires more time for the “positive effects of the current stimulus to be felt’’ before adding that "should it become necessary to further address risks of too prolonged a period of low inflation, the governing council is unanimous in its commitment to using additional unconventional instruments within its mandate…”.

Charting the course of the Titanic

These types of comment are such nonsense. For goodness' sake, there has been far too much dither, delay, denial, and indecision already. How bad does it have to become before action is taken? Presently, Eurozone inflation is sinking faster than the Titanic… we all know what happens to unsinkable ships.

Repeatedly, Draghi has said that the ECB is aware of the risks and is ready to act should they increase. Well, Mr. President... the time to act is now, not next year. 

It was actually time to act several months ago, but we cannot turn back the clock. So act now for goodness' sake!

In fact, if one looks back over the past year, one can nearly anticipate what Draghi will say next Thursday. After all, at the policy meeting press conference on February 6, he cited the need for
“more information”.

That could explain why he hadn’t added more stimulus at that point. But then, he repeated on February 23 that officials "ready to take any action…”.

Now or never

Honestly, if the ECB were a private sector organisation, its share price would be at rock bottom and its shareholders would likely turn the management out, as they are lethargic, arrogant and incompetent.

Earlier this year, inflation in six German states slowed. This proved to be good indicator for the path of the German CPI, and way back then I argued that the governing council should pay close attention to the inflationary trend. 

They did not, and now look at the mess the region is in...

It does not help that the reform at the national level is not materialising. 

Today Italy’s unemployment rate rose above 13% in October, setting another new record as businesses refrain from hiring amidst the country’s longest recession since World War II.

The unemployment rate rose to 13.2% from a revised 12.9% the previous month, the highest rate seen since the quarterly series began in 1977.


A view to the metaphorical horizon. Photo: iStock

My message to President Draghi is this, and it is simple:

Just because your fellow Italians are not offering swift and aggressive action to solve their national problem, there is no excuse for you to be inactive and ignore your regional problem. 

Act now, or next year, the Eurozone may decide to quantitatively ease you from your office.

Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or comment below to engage with's social trading platform.
thewickedwiz thewickedwiz
Do you have any proof that QE solves deflation problems?
USA and Japan tend to disprove your theory.
I even doubt that QE has solved underlying economic problems.
True it has helped some currencies decrease in value and unleashed speculative bubbles, but is that what the world needs?
Stephen Pope Stephen Pope
Japan is a most curious case; struggling through a lost 30 years , however, I do not accept that QE has had no effect. CPI was lowest at -2.52% in October of 2009. In more recent time the local low was booked at -0.6% in January 2011. Since Abe came to power & the BOJ has been buying more JGB assets we saw inflation at 3.7% in may this year & it was most recently booked at 2.90% in October.

In the US CPI was at 5.6% in July 2008 from quickly during the height of the financial & economic crisis to -2.7% in July 2009 but recovered to 3.0% in September 2011. Yes, since then it tracked lower to 1.4% in July 2012 but since then it has cycled between 1.0% & 2.1%.

The UK has CPI at 5.2% in September 2008. With the economic lag effect it fell to 1.1% in October 2009, recovered to 5.2% in October 2011; whilst lower now, like the US UK CPI cycles between 1.2% and 2.9%.

This is better than the Eurozone whose real problems are a lack of structural reform in France and Italy & a sluggish ECB.
thewickedwiz thewickedwiz
Well "better" is a subjective view . I would like QE because it will help the Euro on its way down which I think will happen anyway. I must say though the most impressive economy long term in Europe was Germany that had low inflation for many years after the war.
True there was not the boom and bust of the UK or US property market but a great deal of social justice.
Ottmar Issing would probably disagree with your views ...still it seems to me the Germans will lose this battle very soon and Euro will go to par.
We will see if that is better in the end.
As I have said for two years, the advantage the USA has is the cheap energy , we cannot compete here in Europe, QE was probably less important than the people who mismanaged the FED think.
Stephen Pope Stephen Pope
The US dealt with banking system issues quickly and fairly decisively . In Europe there have been three stress tests of which only the last of which had rigour. Everything takes far too long to be resolved and enacted in the Euro zone. Too many political agendas geared to intervention and a lack of reform.
thewickedwiz thewickedwiz
Agreed, they acted decisively to protect vested interests, and in Europe it is done behind closed doors.
LeTaulier_Lmi LeTaulier_Lmi
Hi Stefen,

I do agree with thewickedwiz..and I do not.
I thinks that QE solves deflation problems but in the same time it creates complex problems like the Moral hazard.
If France, Italy etc. know that, “whatever it takes”, the BCE will support theirs deficit and debt. How they will be encourage to make the reforms they need to do?
Eurozone is not a country like U.K., USA or Japan. Flemish people don't want to pay for Walloons, Catalans for Madrid or North Italians for South Italians even they live in the same countries . So how would you explain to Nordic and Protestant people that they shall give a guarantee for loans in favour of South and Catholic people.
Stephen Pope Stephen Pope
I concur with the issue of moral hazard. Just reflect on the lac of progress since September 2012 when OMT was first proposed by Draghi. It was an insult to the ECB that the Spanish PM, Mariano Rajoy demanded to know what exactly what securities would be required and even then was pushing for long dated debt to be purchased.

In the 26 months since OMT was proposed only Spain, among the leading four economies of the EZ has offered any reform and yet its unemployment is horrendous. Hollande has no idea as to how to run a pro-business policy and in Italy the succession on Monte...Letta and now Renzi are all shying away from the hard reform needed as soon as the public take to the streets.

I have suggested that time must be called on the non-reforming politicians being able to enjoy skinny yields. The ECB should state that it will buy sovereign debt from Austria, Finland, Germany, Ireland, Netherlands and maybe Portugal who have tried hard and engaged in slimming down the state.
LeTaulier_Lmi LeTaulier_Lmi
"The ECB should state that it will buy sovereign debt from Austria, Finland, Germany, Ireland, Netherlands and maybe Portugal..."

You know that Draghi will never do this.
First he is Italian and will not discriminate his own country.
Second the QE would concern all the countries of the EZ according to their total debt or GBP but never according what they did right or wrong. It would be a serious violation of the charter of the ECB. ECB is in charge of the monetary policy and not the exchange policy and even fewer the political actions of the states-
Stephen Pope Stephen Pope
I was giving my view of the draconian action tat should be taken. But I have to say Draghi has been doing a fine job of weakening the Euro. It is like looking looking a purring cat when he says that the exchange rate is not his concern. Pretty soon the Eurozone is going to have to face up to several very hard and unpalatable truths. The worst is that several nations through their inertia to reform are like deadweights. Secondly, if the ECB is the prime monetary force, why is BUBA allowed to block so much policy? I now see Sabine Lautenschlaeger, one of the ECB’s six-member Executive Board is opposed to QE. This is going to be a pivotal week.
LeTaulier_Lmi LeTaulier_Lmi
I don't share your enthusiasm for QE. This monetary policy creates more problem than it solves. It solves short-term problems but in the same time it creates a stock market and a real estate bubble.

BUBA plays its role whereas Banque de France and others European national banks just follow the instructions given by their government which are obsessed with the next political election.
Stephen Pope Stephen Pope
I see QE as an extreme but legitimate tool for any CB to use. Without QE from the Fed I dread to think where the world economy would be.
LeTaulier_Lmi LeTaulier_Lmi
I do agree with you QE is an extreme tool but legitimate is a subject of discussion. If it breaks the rules there is nothing legitimate.
The road to hell is paved with good intentions. Subprime was one.


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