August 6, 2020

Draghi Takes Bold Approach at European Central Bank

Since taking office a little more than a month ago, he has presided over an interest rate cut, signaled a greater willingness to deploy the bank’s resources to fight the European debt crisis and turned up the pressure on governments to remake the euro zone.

More action is likely on Thursday when the bank’s policy council meets. Analysts predict another cut, perhaps a big one, in the bank’s benchmark interest rate, now at 1.25 percent.

The central bank is also expected to start offering longer-term loans to commercial banks to compensate for a flight from European financial institutions by private lenders.

And Mr. Draghi is likely to re-emphasize the bargain he hinted to political leaders last week: The central bank will take steps to temporarily stabilize financial markets if politicians make real progress on fixing the structural flaws in the euro zone to make future debt crises less likely.

It remains unclear just what Mr. Draghi meant — just as it remains uncertain whether Germany, the euro region’s chief financier, will go along with whatever steps Mr. Draghi might have had in mind.

But Mr. Draghi seems unburdened by past policy moves by the central bank and determined to take the initiative before the strains of the crisis exhaust him, as they sometimes seemed to have worn on his predecessor, Jean-Claude Trichet.

While Mr. Trichet, whose term ended in October, remains an esteemed figure in Europe, with legendary stamina, three years of nearly nonstop crisis management took their toll in his final months in office. For now, at least, Mr. Draghi, a former head of the Bank of Italy, appears fresh and unafraid of putting his own stamp on policy.

“Draghi can say different things,” said Marie Diron, an economist in London who advises the consulting firm Ernst Young. “People won’t say, ‘This is not what you were saying a few months ago.’ It makes a change of policy, a bit of U-turn, easier.”

But will it be enough to satisfy the large body of economists and political leaders who contend that the last stage of the crisis must include much more aggressive and controversial action by the central bank?

Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels, argues that the central bank may have no choice but to become the lender of last resort to governments and not just commercial banks, as the only way to prevent market panics that drive up borrowing costs for sovereign governments, like Italy’s.

“A lender of last resort needs to be created in order to stop self-fulfilling sovereign crises,” Mr. Wolff wrote on Monday. “Interest rates paid on sovereign bonds in a number of countries are clearly the result of self-fulfilling crisis, which will ultimately force default even on a country like Italy, with devastating consequences for the euro area as a whole.”

For all his differences in tone, Mr. Draghi inherited the tensions that made Mr. Trichet’s tenure so difficult, including a mandate for the central bank that did not anticipate the crisis now threatening the European and global economies. He faces, as Mr. Trichet did, resolute opposition from Germany to any expansion of the bank’s writ beyond a single-minded focus on price stability.

Mr. Draghi, in a speech to the European Parliament last week, hinted that the central bank would intervene more aggressively in bond markets to keep interest rates under control in countries like Italy and Spain, if euro zone leaders would exert more financial discipline over member nations. But it is not yet clear what he meant.

Would the central bank simply expand bond-buying modestly? Or would it cross the Rubicon and buy securities on a scale that would significantly enlarge the money supply? He did not say.

In any case, the reaction in Germany to Mr. Draghi’s remarks was swift. Jens Weidmann, the president of the German central bank, said he remained stalwartly opposed to more bond market intervention, which he said he regarded as an illegal transfer of debts from one country to another. Mr. Draghi would risk straining the unity of the euro zone if he radically stepped up European Central Bank purchases of government bonds over the objections of Germany, the European Union’s largest member.

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