Mario Draghi’s monetary policy package announced is being fiercely contested and may no longer be sufficient to stave off a recession across the whole of the Eurozone.
Draghi has argued that the Eurozone’s economy is inherently weak and with low inflation, which necessitates a monetary policy response that includes cutting interest rates and launching a new round of bond purchases. The ECB’s board is, however, deeply divided over a commitment to buy €20 billion of sovereign debt a month.
The Netherlands’ Finance Minister Klaas Knot has called the Banks’ policy “disproportionate” and has gone on to argue that it could also be deeply ineffective. Jens Weidmann, the president of Germany’s Bundesbank, has accused Draghi of “going overboard”. For both countries, the main issue at hand is that their national pension funds are under pressure as government bonds are not offering yields.
In an unexpected move, France’s Francois Villeroy de Galhau also opposed quantitative easing, which prompted Austrian Central Bank governor Robert Holzmann to say that the ECB’s package is a likely “a mistake” that incoming European Central Bank President Christine Lagarde should reverse.
Balancing the diverging priorities of the 19-member Eurozone appears increasingly difficult. The Netherlands and Germany are facing a real estate boom, accentuated by full employment, cheap liquidity, and soaring rental prices.
The Eurozone’s periphery is, however, facing high borrowing costs and chronically high unemployment and underemployment. A “systemic approach” is not the norm. Latvian Governor Ilmars Rimsevics and Finland’s Governor Olli Rhen are publicly siding with Draghi.
Many favour a coordinated budgetary policy to complement monetary policy. During her confirmation hearing in the European Parliament, Lagarde insisted that governments needed to do more to stimulate growth.
Once again, Germany will, for the fourth consecutive year, run the world’s largest current account surplus in 2019, according to an Ifo economic institute report. The Eurogroup has yet to commit to the coordinated fiscal stimulus, despite the fact that Eurozone’s growth has halved to 0.2% in the second quarter.
The German economy is effectively driving the contraction, falling to -0.1% in the second quarter and is expected to shrink by a further 0.3% in the third quarter.
Draghi has urged the Eurozone’s governments to increase their spending, a view that was echoed by French Finance Minister Bruno Le Maire. During the last Eurogroup meeting earlier in September, Le Maire specifically referenced Germany, the Netherlands, and Austria when he called on “countries with fiscal space” to spend more.
Italy’s new finance minister Roberto Gualtieri joined the chorus of those who have called on the Eurozone’s largest economies to broaden their expansionary fiscal policy.
Portugal’s Mario Centeno reiterated that the Eurogroup “stands ready to act”, but is currently in no position to plan a coordinated action. Centeno expressed hope that the tentative Eurozone budget will come into being in 2021, which could help bolster the overall economy of the European Union.
In 2009, the EU responded to the Lehman Brothers collapse with a coordinated €200 billion stimulus program, equivalent to 1.5% of GDP. This sum is far smaller than the German current account surplus, which is further enhanced by the fact that Germany’s sovereign bond yields are negative, making a public investment programme far more cost-effective.