Mario Draghi signaled that the European Central Bank will consider adding fresh stimulus later this year when it has a clearer picture of the economic impact from the U.K.’s vote to leave the European Union.

“Over coming months, when we have more information including staff projections, we will be in a better position to assess the underlying macroeconomic conditions,” the ECB president told reporters in Frankfurt on Thursday after a meeting of the Governing Council. “If warranted to achieve its objective, the Governing Council will act by using all instruments available within its mandate.”

The risk for the euro area is that its recovery might prove too fragile to cope with any downturn in trade and investment as a consequence of the Brexit vote. Even so, after calming market volatility with pledges of liquidity, officials have bought themselves time to judge how much further they can push their unprecedented easing, especially in the absence of more support from government policies.

David Fuller's view

This is another sobering assessment by the European Central Bank (ECB) president.  In mentioning Brexit, he also comments on the lack of both structural reforms and fiscal spending in the EU.  We have heard this before and Mario Draghi remains the prime source of stimulus within the EU, while frequently mentioning in previous discussions that the ECB’s efforts, on their own, are insufficient to revive GDP growth.  In the Audio within Bloomberg’s article above, Draghi also says: “Risks to the Euro area growth outlook remain tilted to the downside”.

In reality, the wheels have been falling off the Eurozone’s economic project and this started well before Brexit.  The EU has its single currency but this remains lethal against the background of incomplete reforms for the region’s banking sectors.  Moreover, there is minimal public support for the fiscal union which should have preceded the single currency. 

The EU has a long history of ignoring wake-up calls although Brexit is now concentrating minds as never before.  Whether this plays out sensibly or acrimoniously remains to be seen.  However, the European superstate with 27+ members and a single government appears very unlikely.  Instead, we are more likely to have regional fragmentations.  Southern European countries could become associate members of the EU, with their own currency or more probably individual currencies.  This may appeal to Scandinavian countries as well, and they all have their own currencies except for Finland.  Eastern Europe wants protection from Russia, although that may only come about through their own alliance as members of NATO, and possibly associate memberships of the EU.  Central Europe could maintain the Euro but the economic weighting among countries would be uncomfortably unequal.