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The ECB Looks on the Bright Side, But Fears Donald Trump’s Agenda

European Central Bank President Mario Draghi Announces Interest Rate DecisionEuropean Central Bank President Mario Draghi Announces Interest Rate Decision
Welcome to Germany, Secretary Mnuchin. Please be nice.Photograph by Jasper Juinen — Bloomberg via Getty Images

For the first time in years, the European Central Bank is sounding relatively optimistic. Growth is up, confidence is up, joblessness is down and the specter of deflation is banished. What could possibly go wrong?

Donald Trump, that’s what.

Mario Draghi was too polite to mention him by name, but it was clear from his monthly press conference that the ECB president sees the new administration’s agenda on trade and its attitude to the related issue of foreign exchange markets as two of the biggest risks to the Eurozone economy.

In 10 days’ time, President Trump’s new Treasury Secretary Steven Mnuchin will meet his counterparts from the G20 (a group that includes all the biggest advanced and emerging economies) in Baden Baden, Germany, and markets are anxious to see whether he sends any signal of breaking with past orthodoxy on trade and forex exchange, as many of Trump’s own statements have suggested.

There has been some alarm abroad this week after Reuters reported that the first draft of the meeting’s communiqué has dropped the group’s traditional commitment to avoid protectionism and not to manipulate exchange rates to gain trade advantages. Even a pledge, previously notably only for its blandness, to “consult closely on exchange markets” has been dropped.

“They have been the pillars of prosperity for many, many years, many decades. and so it’s quite important that the G20 reaffirm these commitments,” Draghi said.

Trump has openly accused China of being a currency manipulator, and has also implicitly criticized Japan, while his trade adviser Peter Navarro has more than once effectively accused Germany of using an artificially cheap euro to boost its exports. But Mnuchin, who is ultimately responsible for foreign exchange policy, has yet to make any formal statements on the subject, beyond a boilerplate defense of the “long-term strength of the dollar” during his Senate confirmation hearing.

Drafting the communiqué is usually the task of the hosts, so it’s possible that Germany was flagging its concern about the new U.S. administration by saying it wasn’t sure that Mnuchin would sign up to what is essentially a lowest common denominator of civilized conversation between the world’s governments.

Draghi made it clear there’s a lot riding on Mnuchin’s position next weekend, saying that geopolitical issues have replaced the Eurozone’s chronic woes as the chief source of risk for a region that is now growing at its strongest rate in six years.

“Domestic sources of risk have been contained, the importance of domestic risks has decreased and the geopolitical risks’ share of importance (sic) has gone up,” Draghi said. He pointed out that the EU’s barometer of business and consumer confidence is at its highest since 2011, and the Eurozone jobless rate, at 9.6%, is at an eight-year low.

Earlier, the ECB had left its official interest rates and quantitative easing program unchanged, as universally expected. The question beforehand had been how much Draghi would change the bank’s guidance on future policy to reflect the improving outlook. The answer was “more than was expected.” Draghi stressed that the ECB’s governing council only “expects” to keep interest rates “at or below current levels” for the foreseeable future, whereby an expectation is short of ruling out a rate hike. The euro rose half a cent to a one-week high of $1.0606 on the news and forward euro interest rates now expect a first, modest interest rate increase in the first half of next year.

On today’s showing, that’s still probably a lot earlier than Draghi and colleagues would like to move. Draghi said that there were still more downside risks than upside ones, and gave no indication that the ECB would start ‘tapering’ bond purchases before the end of 2017.