Draghi Prepares to Act Against Risk of Deflation
Here is the opening and also the last paragraph of this informative article from Bloomberg on Mario Draghi’s intentions ahead of his important battle with Jens Weidmann & Co later this month:
Mario Draghi gave his strongest signal yet that the European Central Bank is likely to start large-scale government-bond purchases by saying he can’t rule out deflation in the euro area.
The ECB president seldom gives interviews and his comments to the German newspaper Handelsblatt reflect a drive to win over that nation. Policy makers there have led criticism of quantitative easing, saying it threatens financial stability, reduces the incentive for governments to restructure their economies, and is legally tricky.
“The risk cannot be entirely excluded, but it is limited,” Draghi said when asked if the region could enter a spiral of declining prices, falling wages and postponed spending. “We have to act against such risk.”
While Bundesbank President Jens Weidmann has argued that more action is unwarranted as slumping oil costs provide an economic stimulus, others have warned that the drop in crude prices could tip the currency bloc into full-fledged deflation. Data next week is forecast in a Bloomberg survey to show euro-area consumer prices dropped 0.1 percent in December from a year earlier, the first decline since 2009.
“Traditional hawks who had wanted to stick to standard monetary-policy instruments in the wake of the worst financial crisis in 80 years have been proven wrong and wrong again,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Instead of inflation and moral hazard as the feared result of some non-standard policies, the euro zone is getting ever closer to deflation.”
“We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation,” Draghi said in the interview. “There’s unanimity in the ECB council on that.”
“Important structural reforms -- more flexible labor markets, less bureaucracy, lower taxes -- are coming too slowly,” he said. “It is very clear that our monetary policy would be more effective if governments implemented structural reforms.”
Against the background of Europe’s economic performance over the last few decades, it is very hard to disagree with the logic of this last paragraph above. Mario Draghi remains the Eurozone’s best hope but if he is hamstrung in terms of remaining a clear voice and fully in charge ECB monetary policy, watch out for fallout as the EU moves closer to implosion.
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