Yesterday, Mario Draghi, the outgoing European Central Bank president, made one last plea to Eurozone leaders for support, telling the EU’s great and good that ECB policies are now no longer providing the same level of stimulus that they have in the past. In what feels like a pointed finger to German chancellor Angela Merkel, Draghi stated that the EU needed ‘fiscal capacity of adequate size and design: large enough to stabilise the monetary union, but designed not to create excessive moral hazard’ adding that ‘National policies cannot always guarantee the right fiscal stance for the euro area as a whole’.
However, we may have already seen that the relationship between the ECB and EU leaders may be about to change. Before Draghi’s swansong, over the weekend, Luis de Guindos, the ECB's vice president said that in future the policymakers at the Central Bank will climb down from their ‘ivory towers’ to face the realities of the eurozone. Luis de Guidos believes that with Christine Lagarde, the former head of the International Monetary Fund replacing Draghi at the beginning of next month, there will be, if not a change in direction, certainly one that is more open and more communicative.
In an interview with a Spanish newspaper, de Guindos, himself a former Spanish finance minister told a journalist ‘Central bankers have sometimes been working in an ‘ivory tower’ adding ‘Christine Lagarde – not to mention myself – is well versed in the euro area's mechanisms. The ECB's decision-makers need to understand the context, make sound choices from among the alternatives and communicate appropriately’.
Also, interestingly, De Guindos also touched on the ECB stimulus measures, which has seen its deposit rate continue to fall further into negative territory, again not to everyone's liking. However, he did acknowledge that the side effects of the ECB bond-buying programme was becoming increasingly evident and the forces causing the lack of inflation were more or less out of the ECB’s control. ‘Inflation has indeed been below the objective for some time, but behind this, there are structural changes for which we don’t yet have a full explanation’ he said. However, he also believes the fact that not everyone is singing from the same hymn sheet is not helping matters. As he put it, diplomatically, the splits ‘were not contributing to the effectiveness of the policies’.
Lastly, Paul Chan, Hong Kong’s financial secretary, believes the region is now in recession after nearly 6 months of anti-government protests, adding that he also believes there will be no growth for the rest of the year. In a blog post yesterday he said ‘The blow to our economy is comprehensive’ adding ‘The government will be announcing its advance estimates for the third quarter on Thursday. After seeing negative growth in the second quarter, the situation continued in the third quarter, meaning our economy has entered a technical recession’. On growth for the rest of the year, he said, ``It seems it will be extremely difficult for us to reach full-year economic growth of 0 to 1%. I would not rule out the possibility that the full-year economic growth will be negative’.