EUROPE´S ECONOMY THROWS A WRENCH IN THE ECB´S PLANS / THE WALL STREET JOURNAL

Europe’s Economy Throws a Wrench in the ECB’s Plans

International trade conflicts and an economic slowdown threaten to delay the bank’s exit from its bond-buying program

By Tom Fairless
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The European Central Bank headquarters in Frankfurt. Threats to the 19-nation currency union are putting investors on edge. Photo: Krisztian Bocsi/Bloomberg News 


FRANKFURT—The outlook for the eurozone economy is darkening at just the wrong time for the European Central Bank.

The world’s number two central bank is preparing to phase out its giant bond-buying program, four years after the Federal Reserve wound down its own quantitative easing program. But threats to the 19-nation currency union are mushrooming. They range from international trade conflicts to a recent economic slowdown to a new governing coalition in Italy that is putting investors on edge.

At the ECB’s latest rate-setting meeting in April, the bank’s senior officials called for patience in phasing out easy money, warning in particular about mounting trade protectionism, according to minutes of the meeting published on Thursday.

Any delay to the ECB’s exit from easy money is risky, however. The central bank is fast approaching the limits of the bonds it can buy under self-imposed rules that aim to prevent excessive market distortions or subsidies for governments. Breaching those rules could trigger fresh lawsuits against the central bank, which has fended off multiple German-led challenges to its stimulus policies.

The ECB’s exit plans appear to be on track, for now. Officials expressed “confidence in the underlying strength of the euro area economy” at their April meeting, according to the minutes. They attributed the recent slowdown to a certain “normalization” from exceptionally fast growth last year, as well as temporary factors such as poor weather, strikes and a wave of influenza.

Still, economic data published since that meeting suggest the slowdown has persisted. A closely watched survey of eurozone businesses, published on Wednesday, showed activity slowed for the fourth straight month in May and more sharply than expected.

Crucially, inflation in the region—which the ECB aims to keep just below 2%—is still far too weak. Core inflation—stripping out volatile energy and food prices—slid to 0.7% in April, around the same level as when the ECB launched its giant bond-buying program in early 2015.

ECB officials also warned that trade conflicts could reduce the confidence of businesses and households, and lead to disorderly movements in exchange rates and heightened volatility in financial markets.

President Donald Trump has threatened to impose tariffs on European Union steel and aluminum imports unless the EU opens its markets wider to U.S. products. Mr. Trump is engaged in similar disputes with other nations, including China.

Speaking in Brussels Thursday, the ECB’s chief economist Peter Praet said the economy was strong despite some clouds, and blamed the recent weakness in part on bottlenecks resulting from high output. He said the impact of Italy’s new government wasn’t yet clear.

The minutes “confirmed that the ECB is in no hurry to change its current monetary policy stance,” said Carsten Brzeski, an economist with ING in Frankfurt.

“The surge in oil prices and Italian politics will further complicate the ECB’s road to taper,” or phase out, its bond purchases, Mr. Brzeski said.

Yields on Italian government bonds have risen by more than 60 basis points over the past three weeks as investors worry the new government could follow through on its promises to challenge European Union orthodoxy. Spanish and Portuguese government bond yields have also been rising.

By extending its bond purchases, the ECB would ease the pressure on southern eurozone governments. But many ECB officials worry about the side effects of continuing the bank’s stimulus policies for too long. Unlike their U.S. counterparts, eurozone households, businesses and governments have made little progress in paying down their debts since the financial crisis.

In a separate report Thursday, the ECB warned of historically high debt levels in the region, and said a slowdown in growth could hurt investor appetite for the bonds of highly-indebted governments.

At their April meeting, ECB officials called on highly-indebted governments to reduce their debts, and urged them to avoid pro-cyclical spending policies.