ECB Chief Draghi to Germany: Calm Down, Yo


European Central Bank leader Mario Draghi has a message for Germany: Just chillax.

Germany’s media isn’t normally as breathless as, for example, the British press, but it’s always willing to whip Germans up into a frenzy over the ECB’s zero interest-rate policy, especially in an election year.

This week, Germany’s business pages have been full of little warnings about the Return of Inflation, the biggest bogeyman in the Teutonic economic lexicon, all because the annual consumer price index rose to its highest level in over three years in December, a shocking 1.7%.

“This horror graph threatens our savings!” screamed the continent’s biggest-selling daily, Bild-Zeitung.

But ECB President Mario Draghi wasn’t having any of it Thursday. In his regular press conference after the ECB’s governing council meeting, he said the uptick is “overwhelmingly” due to energy prices having hit a seven-year low this time last year, creating a base effect that exaggerates today’s modest rebound. Core inflation, which strips out food and energy prices, is still running at 0.9% year-on-year, barely half of the ECB’s medium-term target.

In other words, forget about higher interest rates. Forget about cutting the amount of money being created with quantitative easing (which the ECB chose to extend through the end of 2017 at its last meeting). There will be no move to tighter policy until there is a “self-sustained, medium-term” increase in inflation across the Eurozone. “Be patient,” he said.

The ECB doesn’t expect anything like that till the end of next year, at the earliest. ING-Diba economist Carsten Brzeski noted wryly that the only thing that could bring it about sooner is the kind of fiscal stimulus in places like Italy and Greece that Berlin has been fighting against tooth-and-nail.

But defending that line is going to make it a long year for Draghi and his colleagues. There will be elections in the biggest two economies in the Eurozone (France in May, Germany in September), and the ECB will be a political punchbag in both. German finance minister Wolfgang Schäuble has already blamed Draghi’s low-interest rate policy for the rise of the populist right-wing Alternative für Deutschland, which performed well in regional polls last year at the expense of Chancellor Angela Merkel’s Christian Democrats.

By contrast, Front National leader Marine Le Pen, currently leading the opinion polls in France’s Presidential elections due in May, routinely attacks the ECB’s policy as too tight and Germanic (albeit she recently diluted her comments on taking France out of the euro into something much less coherent than the brutal “Frexit” she threatened earlier). Much of the French Left thinks the same way.

Against that backdrop (the Netherlands also has elections in March, and Italy may yet call them later this year), the likeliest course is that the ECB remains “on autopilot” for the rest of the year, happy just to dodge the flak that will inevitably come its way.

That means that if the Federal Reserve feels the need to respond to President Donald Trump’s new economic policies with higher interest rates, as Chairwoman Janet Yellen again hinted yesterday, there’ll be little to stop the dollar rising further against Europe’s single currency. The dollar has eased off in the last couple of days since Trump complained about it being too strong, but, after rising half a cent on the back of Draghi’s press conference, it’s still close to a 14-year high against the euro.

Asked about the effects of Trump’s likely economic policy on the euro, Draghi swerved easily with a ‘too-early-to-tell’, saying “I’d rather comment on policies than statements.”

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