In a landmark speech on Friday, the ECB president said it would be
"helpful for the overall stance of policy" if fiscal policy could
play a greater role alongside the ECB's monetary policy, adding:
"and I believe there is scope for this".
The comments marked an end to the tacit coalition of ECB support in
combination with German-style fiscal austerity that has been in
place since the outbreak of the euro zone crisis. Draghi is now
positioning himself closer to France and Italy.
In effect, Draghi is placing more of an emphasis on fiscal stimulus
"It's an enormous change," said ING economist Carsten Brzeski.
"It is admitting that the recovery might not come, that the euro
zone's problems go beyond structural reforms and austerity measures.
It might be a U-turn for how the ECB looks at fiscal policy but not
so much for how it looks at monetary policy."
The euro zone economy is in danger of slipping again into recession
and inflation is barely registering in many places.
This comes after the ECB has cut interest rates to record lows,
plied banks with cheap funding, offered them a new targeted lending
program beginning in September and said it is ready to do more if
So now Draghi wants governments to do more to boost demand, which
has been crimped by belt-tightening in crisis-hit states on the euro
zone periphery. The core is also starting to face weakness, with the
Ukraine crisis sapping business sentiment.
Highlighting the bloc's woes, a survey on Monday showed German
business morale dropped for a fourth straight month in August. Euro
zone inflation data on Friday is expected to slow to 0.3 percent --
far below the ECB just-under-2-percent goal.
The French government resigned, meanwhile, a day after Economy
Minister Arnaud Montebourg called for new economic policies and
questioned neighbor Germany's "obsession" with budgetary rigor.
Draghi also used his speech at the Jackson Hole gathering of central
bankers to point out that "financial markets have indicated that
inflation expectations exhibited significant declines at all
horizons" in August.
He pointed to falls in the so-called five-year, five-year forward
breakeven rate <EUIL5YF5Y=R> -- the ECB's preferred measure of the
inflation outlook, which measures roughly where investors see
five-year inflation rates in five years' time.
This measure dropped almost 20 basis points in August alone, to last
trade at 1.96 percent. Traders say it is close to its 2010 record
lows of around 1.90 percent.
Berenberg bank economist Christian Schulz described as "ominous" a
sentence in the speech in which Draghi said of the shifts in
"The Governing Council will acknowledge these developments and
within its mandate will use all the available instruments needed to
ensure price stability over the medium term."
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This raises the stakes for the Council's Sept. 4 policy meeting,
with financial markets growing more excised about the prospect of
the ECB embarking on a policy of quantitative easing (QE) --
essentially printing money to buy assets.
An intense policy debate can be expected at the meeting, though it
is probably too early for the ECB to embark on QE.
Such an asset-buying plan could weaken the euro further, giving
exporters' an edge. However, opponents of the tool say there is
little point in spending billions on bonds to lower their yields
slightly when they are already near record lows.
Before embarking on QE, the ECB wants to assess the effectiveness of
its new targeted loans, or TLTROs.
The ECB is offering banks a first tranche of the TLTROs on Sept. 18,
with a second shot in December and more thereafter. It expects total
take-up of 450-850 billion euros. The ECB is also intensifying
preparations to buy asset-backed securities (ABS).
"I don't think Draghi) wanted to signal that there is something
coming at the next meeting but I think he does expect the
discussions will be intense...," Schulz said. "QE is definitely now
The ECB is coming under pressure from its peers to do more.
James Bullard, a top official at the U.S. Federal Reserve, on Friday
called on the ECB at the Jackson Hole conference to act to bolster
the euro zone economy and lift inflation.
Bank of Japan Governor Haruhiko Kuroda told Italian newspaper
Corriere della Sera he does not expect the euro area to slip into
deflation but is confident the ECB will act to stave off such a
threat should it materialize.
Germany's Bundesbank and other euro zone policy hawks will feel
uneasy and under pressure after Draghi's Jackson Hole speech,
particularly as the German public remains deeply skeptical of loose
monetary policy that many see as risky.
"More and more money is not a panacea," the Sueddeutsche Zeitung
wrote in an editorial in its Monday edition, arguing for countries
to bring their economies into order. "That is a task for the
politician - not the central banker."
(Additional reporting by Andreas Framke in Frankfurt and Marius
Zaharia in London Editing by Jeremy Gaunt)
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