The loss of the ECB shield leaves Italy nakedly exposed to market discipline at a delicate time
By Amrose Evans Pritchard and cross-posted from The Daily Telegraph
The European Central Bank has dropped its long-standing pledge to boost stimulus if conditions deteriorate, signalling the triumph of German-led hawks and marking a major turning point in the eurozone’s monetary regime. The approaching end to the QE-era pulls away the protective shield for Italy and the high-debt Latin states, and for thousands of “zombie companies” kept afloat on monetary life-support.
Mario Draghi, the ECB’s president, successfully deflected attention from the policy shift by breaching central bank etiquette and attacking the Trump administration’s tariffs on steel.
“Unilateral decisions are dangerous. If you put tariffs against those who are your allies, one wonders who the enemies are,” he said.
The ECB’s pious defence of the trade system may irk Washington, since the EU has higher protectionist barriers than the US. The eurozone’s current account surplus topped $485bn (£350bn) last year, or 3.5% of GDP, and is now the biggest single distortion to the global trading system.
While part of the eurozone surplus reflects ageing demographics, the scale chiefly stems from policies framed by neo-mercantilist ideology that it refuses to change. This was made worse by fiscal contraction imposed on southern Europe during the EMU banking crisis, which crushed internal demand and forced the Latin bloc to claw its way back to viability through exports. Peter Navarro, Mr Trump’s trade adviser, blames Europe for dumping the consequences of its own warped pathologies onto the rest of the world.
The ECB’s shift in guidance amounts to a tightening of policy, even though the bank admitted that it will not come close to achieving its 2% inflation target this decade. This leaves the eurozone with minimal safety buffers in the next cyclical downturn, vulnerable to a Japanese deflation trap. “They are going to face a problem when the next shock hits,” said Lars Christensen from Markets & Money Advisory.
The ECB has been soaking up eurozone sovereign bonds for the last three years under its QE programme, masking the true fiscal position of vulnerable states. This “golden age” is coming to end. The loss of the ECB shield leaves Italy nakedly exposed to market discipline at a delicate time: in the grip of populist convulsion following the rout of pro-euro elites…