Draghi departs the solar system

Last night the ECB met in Barcelona and once again held on rates.  Mario Draghi opening statement is below.

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Fernández Ordóñez for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Inflation rates are likely to stay above 2% in 2012. However, over the policy-relevant horizon, we expect price developments to remain in line with price stability. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest survey indicators for the euro area highlight prevailing uncertainty. Looking ahead, economic activity is expected to recover gradually over the course of the year. At the same time, as we said previously, the economic outlook continues to be subject to downside risks.

Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Over the last few months we have implemented both standard and non-standard monetary policy measures. This combination of measures has helped both the financial environment and the transmission of our monetary policy. Further developments will be closely monitored, keeping in mind that all our non-standard monetary policy measures are temporary in nature and that we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner.

Let me now explain our assessment in greater detail, starting with the economic analysis. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest signals from euro area survey data highlight prevailing uncertainty. At the same time, there are indications that the global recovery is proceeding. Looking beyond the short term, we continue to expect the euro area economy to recover gradually in the course of the year, supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area economy. However, remaining tensions in some euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment, are expected to continue to dampen the underlying growth momentum.

As we said previously, this economic outlook continues to be subject to downside risks, relating in particular to an intensification of tensions in euro area debt markets and their potential spillover to the euro area real economy, as well as to further increases in commodity prices.

Euro area annual HICP inflation was 2.6% in April 2012, according to Eurostat’s flash estimate, after 2.7% in the previous four months. Inflation is likely to stay above 2% in 2012, mainly owing to increases in energy prices, as well as to rises in indirect taxes. On the basis of current futures prices for commodities, annual inflation rates should fall below 2% again in early 2013. In this context, we will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting. However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.

Risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced. Upside risks pertain to higher than expected commodity prices and indirect tax increases, while downside risks relate to weaker than expected developments in economic activity.

The monetary analysis indicates that the underlying pace of monetary expansion has remained subdued, with somewhat higher growth rates in the past few months. The annual growth rate of M3 was 3.2% in March 2012, compared with 2.8% in February. Since January we have observed a strengthening in the deposit base of banks.

The annual growth rates of loans to non-financial corporations and loans to households (adjusted for loan sales and securitisation) stood at 0.5% and 1.7% respectively in March, both slightly lower than in February. The volume of MFI loans to non-financial corporations and households remained practically unchanged compared with the previous month.

Money and credit data up to March confirm a broad stabilisation of financial conditions and thereby, as intended by our measures, the avoidance of an abrupt and disorderly adjustment in the balance sheets of credit institutions. In this context, the April bank lending survey indicates that the net tightening of credit standards by euro area banks declined substantially in the first quarter of 2012 as compared with late 2011, for both loans to non-financial corporations and loans to households, also on account of improvements in funding conditions for banks. As also indicated in the bank lending survey, the demand for credit remained subdued in the first quarter of 2012, reflecting weak economic activity and the ongoing process of balance sheet adjustment in non-financial sectors. The full supportive impact of the Eurosystem’s non-standard measures will need time to unfold and to have a positive effect on the growth of loans when demand recovers. In this context, it should be noted that the second three-year longer-term refinancing operation was only settled on 1 March 2012.

Looking ahead, it is essential for banks to strengthen their resilience further, including by retaining earnings. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

It is of utmost importance to ensure fiscal sustainability and sustainable growth in the euro area. Most euro area countries made good progress in terms of fiscal consolidation in 2011. While the necessary comprehensive fiscal adjustment is weighing on near-term economic growth, its successful implementation will contribute to the sustainability of public finances and thereby to the lowering of sovereign risk premia. In an environment of enhanced confidence in fiscal balances, private sector activity should also be fostered, supporting private investment and medium-term growth.

At the same time, together with fiscal consolidation, growth and growth potential in the euro area need to be enhanced by decisive structural reforms. In this context, facilitating entrepreneurial activities, the start-up of new firms and job creation is crucial. Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.

In this context, let me make a few remarks on the adjustment process within the euro area. As we know from the experience of other large currency areas, regional divergences in economic developments are a normal feature. However, considerable imbalances have accumulated in the last decade in several euro area countries and they are now in the process of being corrected.

As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term. This is the best contribution of monetary policy to fostering growth and job creation in the euro area.

Addressing divergences among individual euro area countries is the task of national governments. They must undertake determined policy actions to address major imbalances and vulnerabilities in the fiscal, financial and structural domains. We note that progress is being made in many countries, but several governments need to be more ambitious. Ensuring sound fiscal balances, financial stability and competitiveness in all euro area countries is in our common interest.

As I have spoken about many times previously I considers Mario Draghi’s statement about what is happening in Europe to be a view from some other planet. His opening statement appears to a boilerplate introduction and I do wonder if the following statement isn’t actually embossed on the ECBs stationary.

Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level

You can find the latest PMI and employment data from Eurozone here along with information about Eurozone lending here. You can make your own assessment about the data, but I can find nothing in any of the latest information to show anything that I would define as a “stabilisation”. The latest unemployment figures from the Eurozone show that 170,000 people lost their jobs in March and the unemployment rate is the highest it has been in the area since the monetary union has formed. There are now more unemployed people in Europe than there are people in Australia. How anybody can keep a straight face while making these statements is beyond me. This is an economic tragedy, and the worse thing about it is that it has only just begun.

In the Q&A session, usually the most interesting, Mario Draghi went on to say that the “Fiscal compact” and the “Growth compact” are not mutually exclusive. Although Mr Draghi attempted an explanation I still have absolutely no idea what anyone actually means by a “Growth compact” so I can’t make a fair assessment of that statement. But given history, as I have said previously, I am still unconvinced that Europe’s financial leaders have simply re-branded the failed “expansionary fiscal contraction” to pretend they have a new plan.

Draghi also stated that he expected to see economic activity to recover gradually over the course of the year but latest signals from euro-area survey data highlight prevailing uncertainty. This just sounds like wishful thinking to me.

Having said all of that, Mr Draghi was making some sense on Europe’s future, even if he is very late to the party. Although he claimed that the “fiscal compact” was the right path to integration, which I disagree with, he stated that in order for the Union to move forward nations will have to give up sovereignty to some central authority. That is, the monetary union needs a fiscal and political union.

I am not sure if it was my own interpretation of his statement about this, but I felt he sounded quite desperate about these points. In fact, his answers to additional questions made it clear he is fighting against a political machine that he may not have too much faith in. He is absolutely correct on this aspect of the matter, but his words sounded more like a plea than a policy statement. Last night’s debacle over banking regulations proved once again that Europe is unable to overcome national politics to implement anything for the greater good of Europe as a whole, and this is just a repeat of what we have seen since the economic crisis began.

I have talked previously about the massive loss of political capital that has come about because of misguided economic policy, something Mr Draghi has been a very active part of. I expect the coming Greek and French elections to add to that loss and the fact that Mr Draghi refused to answer questions on these topics just added to my concerns.
With economic delusion at one end and political ineptitude at the other, it is becoming increasingly difficult to be optimistic about the Eurozone’s future, even though I dearly wish it could work.

Full press conference below.

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  1. interested party

    Taking a page out of Junckers book.
    “When times get tough, you have to lie”

  2. rob barrattMEMBER

    “the worse thing about it is that it has only just begun”
    Absolutely right. The social fallout that is already apparent in the appearance of extreme parties in Greece is an ominous portent. Shades of the Weimar republic. With maybe Spain etc to follow, anyone who thinks it’s all going to go away in a few months is truly on another planet.

  3. did this guy just say “blah blah blah…. blah blah blahblah blah blah”


  4. I listened to it at thought what a comedy. I did think what planet is this guy on.

  5. Terry McFadgen

    You will find a reasonably detailed explanation of what Draghi means by a “growth compact” in todays FT under the title “Draghi Urges EU to go for Growth”.
    But then that might have spoiled your headline?

  6. Love the title DE.
    If the system worked the blah blah plan could make sense but the system is clearly rotten.

  7. “I considers Mario Draghi’s statement about what is happening in Europe to be a view from some other planet”

    is that like Draghi’s LTRO is a fizzer?


    “I can find nothing in any of the latest information to show anything that I would define as a “stabilisation””

    its all relative DE. comparerd to the “end of the world”… “eurogeddon” scenarios so many here were talking about just a few short months ago id say stabisation is a bit of an understatement.

    draghi has a very good handle on whats going on in the EU. hes a central banker, not a miracle worker. although his LTRO, just a few months into the job, was a stroke of central banking genius. Give me drahgi over stevens, bernanke, trichet or king anyday.

  8. Just read the FT article
    Draghi urges Eurozone to focus on growth
    These were the suggestions:
    -further structural reforms to boost competitiveness and complete Europe’s single market
    -labour reforms that increase flexibility and mobility but also improve the position of younger workers
    -He is calling for a job creating investment initiative using the European investment bank and EU development funding
    -Fiscal consolidation should continue to cut current expenditures

    Labour movement is already free within the EU.
    I wonder what he actually means in practice when it comes to flexibility and mobility. Are we looking at the issue from the perspective of the employer or the employee?
    Language barriers naturally affect labour mobility within the zone to some degree.
    Job creating investment sounds great if they’ve got funding for that. Might be tricky to agree on where and how those investment projects are accomplished.
    It will be interesting to find out more about these plans. It seems that all the leaders take youth unemployment seriously and I could imagine compromises being reached for tackling this. However, youth unemployment is not low and is rising in the north as well. Nothing will be easy.