Mario Draghi can’t save the euro zone alone. He’s going to need help.
This was one of the key messages from a wide-ranging exclusive interview with Handelsblatt, conducted as the European Central Bank’s president prepares to lead his powerful institution into yet more uncharted territory in the early part of this year – the purchase of government bonds in a new round of U.S.-style monetary stimulus known as quantitative easing.
"We are making technical preparations to alter the size, pace and composition of our measures in early 2015, should it become necessary to further address risks of a too prolonged period of low inflation," Mr. Draghi said, adding that the risk of the euro zone falling into full-blown deflation cannot be excluded.
It would mark the most aggressive step yet by the ECB to bolster what Mr. Draghi called a “fragile and uneven” recovery in the 19-nation euro zone, which has failed to pull itself out from under a 2008 financial crisis sparked by bad banks and extraordinarily high levels of government debt.
The euro fell to its lowest level in more than four years on Mr. Draghi's comments, by Monday afternoon dropping 0.5 percent against the U.S. dollar to $1.2032. Spanish and Italian government bond yields also fell to their lowest levels since the start of the euro.
Mr. Draghi is arguably the most powerful policymaker in Europe at the moment, but the interview was also notable for his repeated insistence that others must bear more of the load of rescuing the continent. Without help, the ECB is at risk of losing the confidence of the world’s financial markets.
With his institution’s credibility on the line, Mr. Draghi vehemently urged euro zone governments to implement structural reforms quickly that can make the continent more competitive. He warned that the central bank will otherwise struggle to rescue the euro zone economy from a period of stagnation and low inflation.
It is quite clear that our monetary policy would be much more effective if the countries' governments implement structural reforms. Mario Draghi, ECB President
"Interest rates have been very, very low for a long time – and they will presumably stay like that for a while longer," Mr. Draghi said. “We have a mandate. It is to keep inflation close to, but below, 2 percent. That is our legal obligation. And we must deliver."
With annual inflation in the euro zone falling to just 0.3 percent at the end of last year, Mr. Draghi said the risks of the ECB failing to meet its mandate are "higher than they were six months ago."
He made a plea for help: "It is quite clear that our monetary policy would be much more effective if the countries' governments implement structural reforms,” he said.
Asked which governments need to do more, Mr. Draghi responded: “All of them.”
That includes Europe’s most powerful economy, Germany, which has weathered the financial crisis of the last few years very well compared to most other countries in the euro zone, but has still drawn broad international criticism for failing to do more to stimulate its own economy.
Among other things, Mr. Draghi noted that Europe has among the world's highest tax rates, putting it at a "big competitive disadvantage" to the rest of the world. This also includes Germany.
"The triad of weakness in the reform process, bureaucracy and the tax burden hinder Europe's recovery. If we don't solve this, our growth will remain weak," he said.
Concretely, Mr. Draghi called for more public spending on investment – notably in research, education and the digital agenda. "Other expenditure, and also taxes, should be reduced."
Even as it pleads with governments to do their part, the ECB has said it could soon launch a U.S.-style quantitative easing program that would see the central bank buy as much as €1 trillion in government bonds and other assets from the euro zone nations. Such a plan could be put into action by early 2015 and marks a last-gasp effort by the ECB after other steps – long-term loans to banks, purchasing asset-backed securities, record low interest rates – have failed to stop inflation from falling.
Markets have long been clamouring for such a move, which Mr. Draghi has made clear is being considered despite the stiff objections from German central bankers and politicians, and questions about whether quantitative easing will truly be effective in Europe, which is much more divided and fragmented than the U.S. economy.
Despite his determination to push on, Mr. Draghi made clear that he cares about German public opinion as he defended his policies. The public in Germany, notorious for saving a higher proportion of its income than most countries, has also seen its share of hyper-inflation in the 20th century. That has made it among those countries most concerned about historically low interest rates and other aggressive steps taken by the ECB under Mr. Draghi.
Mr. Draghi said that confronting low inflation is a matter of protecting the ECB’s credibility as a guardian of stable prices. Preventing deflation is just as much a part of the ECB’s mandate as guarding against the kind of high inflation that Germany fears, he argued. It is something that needs to be confronted, even if the likelihood of outright deflation in the euro zone remains minimal.
“The risk [of deflation] cannot be ruled out completely, but it is limited. The important thing is what inflation rate people expect over the medium term. Since June, we have seen that these expectations have declined. If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending. We are not there yet. But we need to tackle this risk,” Mr. Draghi said.
Mr. Draghi said he remains confident the euro zone’s economy will continue its moderate recovery as it enters the new year, and made a bold prediction: no European country will be in recession in 2015.
"Europe is gradually getting stronger,” he said. “I am confident that next year will see all countries in the euro area grow.”
Will Mr. Draghi leave before the job is done? Not likely, he said, rejecting speculation that he could take over as Italian president from Georgio Napolitano, who on Thursday announced he would be resigning.
“My period of office as president of the ECB runs until 2019,” he said.
The interview was conducted by Handelsblatt's publisher Gabor Steingart and chief editors Hans-Jürgen Jakobs and Sven Afhüppe. Christopher Cermak, an editor with the Handelsblatt Global Edition in Berlin, contributed to this story. To contact the authors: [email protected], [email protected], [email protected] and [email protected]
This article was updated at 15:30 CET to reflect market developments.