Mario Draghi said the improvement in euro-area inflation is on a self-sustained path as he struck a confident tone that the European Central Bank (ECB) can withdraw its stimulus despite the rising specter of a global trade war.
Addressing European Parliament lawmakers, the ECB president urged the region’s governments to lead by example by pushing back against creeping protectionism, which he singled out as the main risk for the area’s economic expansion. “We’re confident that basically thanks to our monetary policy the inflation rate will converge to our objectives,” Draghi said in Brussels. While uncertainties related to global factors “have become more prominent, the risks surrounding the euro area growth outlook remain broadly balanced.”
Draghi’s bold tone comes just days after the US slapped tariffs on billions of dollars of imports from China, which retaliated immediately. It echoes comments from Executive Board member Benoit Coeure, who said in a Bloomberg TV interview over the weekend that the ECB is alert to risks from trade tensions that are rapidly escalating, but its current monetary-policy stance is working well.
While the rise in protectionism could potentially hurt the export-focused euro-area economy, French Economy Minister Bruno Le Maire said over the weekend that Europe also won’t shy away from retaliation.
Draghi said that “in times of heightened global uncertainty, it is more important than ever that Europe stands together,” reiterating his push for governments to do more to strengthen the region’s structures.
He stressed the ECB’s measures were playing a “decisive role” in bringing inflation towards the ECB’s goal and with labour markets across the region becoming gradually tighter, wages are starting to pick up. “However, we need to be patient, persistent and prudent in our policy to ensure that inflation remains on a sustained adjustment path,” the president said.
Draghi played down the recent rise in Italy’s central-bank liabilities to the rest of the euro area, saying that while significantly large, it was “not inconsistent with historical experience” and the imbalances should start to decline as the bond-buying program is retired.
The ECB is on course to end its program by the end of this year, but has pledged to keep plenty of stimulus in the pipeline by reinvesting proceeds from maturing debt. That could be an opportunity for Greece to be included in purchases, Draghi said, suggesting policy makers could relax the rules on buying.
The country has been excluded from the quantitative-easing since it started in March 2015.
“Greece can become part of QE if it has a waiver — after the end of the program, only if there is a waiver,” Draghi said. “Now, the current post program surveillance, or enhanced surveillance, doesn’t warrant a waiver and we’ve made it clear.”
Trade war could morph into currency war: Nowotny
The global trade war has the potential to affect exchange rates, leading to additional negative consequences, according to European Central Bank Governing Council member Ewald Nowotny.
“What we just see now is that we have quite interesting effects with regard to the exchange rates,” Nowotny said during speech in Zurich. “Which means that in addition to the trade war, we might have something like a currency war. Even if it is not an intentional war. But it might have effects that are much more heavy than if you just look at the tariffs.”
The world’s two biggest economies have each fired their first shots in what China has called “the largest trade war in economic history.”
Higher tariffs on $34 billion of both nation’s goods began on Friday, with levies on another $16 billion likely to be unveiled in a few weeks.
“It’s very difficult to predict what will be the outcome,” Nowotny said. “If you look at what we have just now, it would not be dramatic. But of course it has potential that it might escalate.”