Draghi talks "dovish", but with his key interest rate close to zero, what can the ECB still do?
Bloomberg via Getty Images
By Geoffrey Smith
August 22, 2014

The European Central Bank is ready to take further steps to stimulate a flagging recovery and bring down unemployment, Mario Draghi told the Federal Reserve’s gathering of central bankers at Jackson Hole Friday.

His words are the clearest reflection yet of the ECB’s concern at the way the Eurozone’s economic recovery has run into the sand this year, depressed by the Ukraine conflict, the failure of Italy and France to enact meaningful, growth-friendly reforms and a strong euro that has badly hit exporters.

They also underline one of Draghi’s favorite themes in recent appearances–namely, that euro rates are going to stay lower for longer than dollar ones, given the gradual tightening of the Federal Reserve’s policy stance. Fed Board chairwoman Janet Yellen, hosting the conference, had earlier hinted that the Fed may raise rates earlier than it previously intended to, as rapid job creation in the U.S. puts some inflationary pressure back into the economy.

That divergence of the rate path is crucial to bringing the euro’s exchange rate down and restoring the competitiveness of, above all, French and Italian exporters. Having peaked at over $1.40 in March, the euro has been falling against the dollar recently and hit an 11-month low of $1.3223 earlier Friday.

“I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further,” Draghi said.

As before, Draghi concentrated on the effects of new long-term lending–“Targeted Long-Term Refinancing Operations”–which will provide cheap and secure funding for banks to lend on to businesses and households. He also talked up plans to buy high-quality asset-backed securities. But he made no reference to buying government bonds–the sort of ‘quantitative easing’ that has been used with varying degrees of success in the U.S., U.K. and Japan.

Draghi highlighted the scale of job destruction in the Eurozone over the last three years and warned that many of the region’s long-term unemployed risk becoming unemployable if they stay out of the labor force for much longer.

“The risks of ‘doing too little’ – i.e. that cyclical unemployment becomes structural – outweigh those of ‘doing too much’,” Draghi said.

Although he combined that message with more familiar strictures on the need for governments to enact ‘supply-side’ structural reforms, the emphasis on supporting demand was more conspicuous for being a novelty. Unlike the Fed, the ECB has only one target in its mandate–to keep prices stable. That restricts the degree to which it can let joblessness affect its thinking–even when the Eurozone’s jobless rate reached an all-time high of over 12% last year.

It has become easier for the ECB to worry publicly about a shortage of demand this year, as consumer price inflation has fallen clearly below its 2% target. With prices rising only 0.4% in the year to July, the Eurozone is widely thought to be in more danger of deflation than inflation.

Although the Eurozone officially exited recession over a year ago, there are still over 18 million people out of work–an eye-watering 11.5% of the labor force. Over half of them have been jobless for over a year–more than twice the share of long-term jobless before the crisis.

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