Dthe countdown is set for Mario Draghi: four times the president of the European Central Bank will hold an interest rate meeting of the ECB, four times decide on the course of monetary policy in the euro area. After that, after eight years, the term of the Italian economist at the head of one of the most powerful central banks in the world ends.
Of the German savers, Draghi is likely to go down in history as the president, who has never raised the most important interest rates. For Europe, a different legacy is much more crucial. With his promise to do everything needed to save the euro, he saved the currency union from imminent collapse during the crisis. No other chief of a European central bank was so creative because Draghi provided the ECB with new tools that allow the monetary authorities to save banks and act much more flexibly than before.
The ECB has therefore moved further and further away from the former estate of the Bundesbank. The question that now moves a lot is therefore: do many things go back after Draghi's farewell? Or does his successor continue in function with the course he has chosen – also because he or she is otherwise unable to do so?
The coming interest rate meeting in Vilnius, Lithuania, will give Draghi a new chance to do things to his advantage. This time, the extremely weak inflation figures are on the agenda of the monetary authorities. According to recent estimates, inflation fell to 1.2 percent in May from 1.7 percent in the previous month.
Inflation expectations continue to fall
The so-called core inflation, which excludes volatile food and energy prices, has even fallen to 0.8 percent. Inflation is thus well below the 2% that the ECB wants to reach in the euro area in the medium term. Draghi was able to temporarily eliminate this slump on Thursday, or suggest that the ECB will, as before, do what is necessary to prevent the euro area from sliding into deflation.
The situation has deteriorated again in recent weeks. Inflation expectations have fallen to 1.28 percent, the lowest level since 2016. Financial markets even speculate about an interest rate cut. Previously, the originally expected interest rate increase was repeatedly postponed. That is why it will be important how Draghi expresses this.
There are also speculations as to whether the ECB will grant banks particularly advantageous terms for long-term loans, the so-called TLTRO. Maybe Draghi could convince the Governing Council of the ECB to do more in view of the weak prospects for the eurozone.
"The danger of becoming a lame duck, this time, will strengthen the supply of supporters of a flexible monetary policy," said Ebrahim Rahbari, strategist at Citi. Rahbari suspects that the president of the ECB is probably trying to secure his legacy – and that even the more austere monetary leaders among the candidates for Draghi will probably be more flexible this time to safeguard their chances.
It would be conceivable that the ECB Governing Council, led by Draghi, would resume bond purchases. Currently, only those papers are being replaced by new titles that have expired. If it were to be reissued, just as in the years 2015 to 2018, the ECB would purchase a certain amount of additional bonds each month.
The problem is that there are currently not enough German government bonds on the market. It is therefore necessary to change the rules to continue the QE program. So far, these stipulate that bonds from every euro-zone bond are purchased pro rata by the ECB so as not to give the impression of unauthorized government financing.
If so, it may be the preparation for a relaunch of the QE program introduced under Draghi. And of which the ECB could not resolve for months. A successor would have a corresponding difficulty in quickly making abzumoderieren a decided program again. The balance sheet total of the ECB has not increased further in the last six months and remains around € 4.7 trillion. That would soon change with a new edition of QE. Depending on how much the ECB would go in this case, the legacy of Draghi could then be read on the ECB balance sheet.
At the same time, political pressure is also increasing. In Italy the situation is further increasing in the light of the impending excessive deficit procedure of Brussels – not to be excluded that the political escalation will lead to increasing spreads on the financial markets. In this case, the call for the ECB as savior of the euro would be loud again. Recently, Italian Deputy Prime Minister Matteo Salvini also caused concerns that the ECB should guarantee the Italian debt to avert the risk of rising risk premiums for the country.
This would be an "OMT pledge without conditions", warns economist Volker Wieland at WELT, pointing to another tool in the ECB toolbox, the controversial program for the direct purchase of government bonds. "However, for bond purchases under an OMT program, the ECB has preceded the condition that the Member State concerned submits a request for a rescue program for the European Stability Mechanism (ESM), which should be accompanied by strict economic policy conditions.
It is not the ECB, but the ESM that the lender is the last resort for Member States, "says Wieland." Mr Salvini will certainly never want to make such an application. "Last but not least, it is important not to" blackmail ". It doesn't matter under which president.
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