Draghi under pressure to deliver fresh stimulus package

Growing opposition to easing will heighten tension at this week’s ECB meeting

Martin Arnold in Frankfurt


Years of aggressive monetary easing by the ECB have hacked away at interest rates © AP


Mario Draghi wants to go out with a bang, by launching a fresh wave of monetary easing before he steps down as European Central Bank president in October — but the vital question is whether the bank’s governing council will agree.

Mr Draghi is expected to put the option of fresh stimulus measures up for discussion at the ECB’s board meeting on Thursday, in response to worries about an economic slowdown and subdued inflation in the eurozone.

He has four main options: interest rates could be cut further into record negative territory; the quantitative easing programme could be restarted to buy more bonds on top of the €2.6tn the ECB already holds; cheap loans can be offered to lenders; and the central bank could strengthen its forward guidance.

With bond markets already pricing in a significant stimulus and the German economy teetering on the brink of recession, the stakes for Mr Draghi are high, especially as he is facing growing opposition from other leading eurozone policymakers.

The heads of the German, Dutch, Austrian and Estonian central banks — who sit on the ECB governing council — have all in the past couple of weeks stated their opposition to the idea of restarting QE.

Sabine Lautenschläger, one of six ECB executive board members, summed up the hawkish backlash by saying: “Based on the current data, it is much too early for a huge package.”




But most investors believe Mr Draghi has pushed the prospect of stimulus so heavily that he cannot back down.

“To take a step back now would be a communications disaster,” said Katharina Utermöhl, senior economist for Europe at Allianz. “The hawkish remarks from some central bank governors only confirm to me that a big package is coming.”

Since Mr Draghi proposed a restart of the QE programme in June at the ECB’s annual symposium in Sintra, Portugal, yields on all eurozone sovereign bonds have dropped, and for the first time all German government bonds up to 30 years in maturity offer negative yields.
“They’ll say: ‘Look at market expectations, if we don’t meet them we will get slaughtered’,” said Melvyn Krauss, a senior fellow at Stanford University’s Hoover Institution. “Everything points to Draghi doing QE at this meeting in September.”

Investors are divided on the size of any new QE programme. Elga Bartsch, head of economic and market research at BlackRock, said the ECB should buy €30-40bn of bonds a month for at least a year. Frederik Ducrozet, an economist at Pictet Wealth Management, said the ECB needed to buy at least €600bn of bonds in total.

Finnish central bank governor Olli Rehn recently said that “substantial and sufficient” bond purchases would be part of the ECB’s September package.

Yet bond prices dipped last week as some investors asked if market expectations had run ahead of themselves. French central bank governor François Villeroy de Galhau added to these doubts by questioning whether it was the right time to restart QE when long-term bond yields have already fallen so hard. “This is a question to be discussed,” he said.

Critics say that any further easing loses its effectiveness when interest rates are already at unprecedented lows, leaving the ECB with few remaining options. But people in Mr Draghi’s inner circle scoff at the idea that he is running out of ammunition or needs to keep some powder dry to allow Christine Lagarde, the incoming ECB president, to respond to risks including Brexit and the US-China trade war after her planned start at the ECB on November 1.




People in Mr Draghi’s inner circle point to the fact that inflation remains weak across the 19-country currency zone. Market participants’ price expectations, as measured by the five-year, five-year inflation swap rate, languish at 1.2 per cent — well below the ECB’s target of close to 2 per cent.

In particular, some key ECB figures think that short-term corporate bond markets are an area where yields could be lowered further. They also think the ECB could raise the proportion of any nation’s government bonds that it can own above the current 33 per cent cap, despite German opposition to such a move.

There is broad consensus that the ECB will cut its deposit rate for the first time since March 2016 when it fell to a record low of minus 0.4 per cent. Even the hawkish German central bank boss Jens Weidmann has begrudgingly accepted this. The only question is whether it will be cut to minus 0.5 per cent or minus 0.6 per cent.

The impact of another rate cut on the eurozone’s already fragile banking system is a concern. The ECB has said it may mitigate this with a tiering system to exclude a portion of banks’ excess deposits from negative rates, similar to rules already in place in Japan, Denmark and Switzerland.




It is also due to provide a fresh wave of cheap loans to banks under its third targeted longer-term refinancing operation. While tiering will help northern European banks that have large excess deposits, the cheap loans will help southern European lenders with higher funding costs.

Finally, the ECB signalled in July that it was considering changing its forward guidance. Instead of committing only to not raise rates before mid-2020, it could say that rates will only rise if inflation expectations come in line with its target.

This would send an even stronger signal that negative rates are here to stay, probably for several years to come — which could be exactly the parting shot that Mr Draghi is looking for.

After two decades in power, Putin should heed the warning signs

Younger Russians have known no other ruler, and at least some of them are thirsty for change

Tony Barber




In an episode that would be hilarious if one read it in the works of Nikolai Gogol or Mikhail Saltykov-Shchedrin, but is actually a grim illustration of Russia’s environmental sickness, officials in a Siberian town were reprimanded last year for painting snow white. Pollution in the coal-mining region is so horrendous that the snowfall is thick with soot and ash. The officials responded, in the time-honoured manner of provincial Russian bureaucracy, by painting over a problem they felt helpless to solve.

Environmental protection is one of several fronts on which lines of confrontation are emerging between an increasingly restless Russian public and the power apparatus of President Vladimir Putin. Dozens of protests have been held across Russia against plans to build vast landfills in the countryside for rubbish from the Moscow metropolitan area and other cities. Simmering sources of discontent include inflation, stagnant living standards, rising retirement ages, new road fees for long-haul truck drivers and efforts to control social media.

If political change is to come in Russia, it may arise from these strongly felt irritations of daily life rather than from the narrower cause of democratic reform embraced by Mr Putin’s most vocal critics. True, weekly demonstrations in Moscow in support of free local elections have drawn larger numbers than at any time since the winter unrest of 2011-2012. The outcry against the arrest of Ivan Golunov, an investigative journalist, on trumped-up drugs charges underlined public indignation at the high-handedness of the police and intelligence services.

At a time when representative democracy and the rule of law are under strain in western countries, and even derided by politicians who should know better, the Russian protests — like similar events in central and eastern Europe — are a useful reminder that the human desire for justice, dignity and freedom is irrepressible. However, the political demonstrations in Moscow do not have the mass character of this year’s protests in Hong Kong, Algeria or Venezuela, or for that matter 1917 in tsarist Russia or 1989-1991 in the former Soviet Union.

One reason for the limited impact of the Moscow protests is that they have so far failed to integrate the complaints of Russian society about, say, environmental degradation and the cost of living. In their call for genuinely competitive elections, they resemble last year’s protests in Poland against government-imposed changes to the judicial system aimed at tightening political control of the courts. Both are worthy causes, but both lack the broad appeal that comes from articulating the public’s rawest concerns.

Another argument, espoused by Mr Putin’s sympathisers in the west, is that the president still commands support from Russian society, even if his popularity has fallen from the heights attained after the 2014 annexation of Crimea and military intervention in eastern Ukraine. However, opinion polls that purport to measure the ­popularity of a semi-authoritarian ruler, who imprisons opponents and blocks all ways of replacing him in free and fair votes, must be interpreted with caution.

An opinion poll taken in 1980, when Leonid Brezhnev had ruled the Soviet Union for 16 years and Andrei Sakharov, the dissident physicist and giant of the Soviet human rights movement, was arrested and sent into internal exile, might well have shown Brezhnev to be more popular. How else are people supposed to answer, when they see no prospect of changing the system? Yet as soon as there was a chance of change, which arose in the partly free elections of 1989, Sakharov and other reformers won sweeping victories.

In Mr Putin’s case, matters stand somewhat differently. He was indeed a popular leader from 2000 to 2008, partly for having ended the social turmoil of the Boris Yeltsin era, and for presiding over a rise in incomes and wellbeing that was lifted by high energy export prices. Even if the elections of this period had been freer than any in Russian history — which they were not — he would surely have won them.

In recent years, economic grievances, environmental concerns and complaints about abuses of power have eroded Mr Putin’s standing with the Russian public. To be clear, his hold on power is not weak. After all, he has overwhelming force at his disposal to crush dissent, and an entourage that depends on him for its wealth and survival. Nina Khrushcheva, a New York-based professor of international affairs and the granddaughter of Nikita Khrushchev, the late Soviet leader, observes: “Putin has perfected a system of corruption, suspicion, injustice and intimidation.”

Still, the passage of time matters in Russia, as in any society. The generations that recall the economic and social collapse of the early post-communist period are fading out, making way for younger Russians who have known no ruler but Mr Putin. At least some of them are thirsty for change.

There have been phases like this before in Russian history: in the 1850s, towards the end of Nicholas I’s long, autocratic rule; after the dictator Josef Stalin’s death in 1953; and in the 1980s, as the so-called “era of stagnation” under Brezhnev and his gerontocratic successors drew to its close. In some respects, the story of Russia since Peter the Great has been one of alternating cycles of reform and reaction.

Perhaps it is premature to detect in the Moscow demonstrations and the environmental protests the first stirrings of the next cycle of liberalisation. The Putin system is not yet in serious trouble. But nothing is forever, not even in eternal Russia.

Flailing at China

Despite years of denial, there can no longer be any doubt that the US is pursuing a bipartisan containment strategy vis-à-vis China. Whether justified or not, the real problem with this strategy is less the merits of the allegations leveled by US politicians than the incoherence of the Trump administration’s policies to address them.

Stephen S. Roach




NEW HAVEN – This will be the tenth year that I have taught a course at Yale called “The Next China.” The course focuses on modern China’s daunting economic transitions. It frames the moving target that eludes US President Donald Trump’s administration, which is taking dead aim at the Old China (a convenient target for a leader who wants to resurrect Old America).

The incoherence of Trump’s trade and economic policies, with all their potentially grave consequences for the global economy, is a destabilizing byproduct of this disconnect.

My course starts with the urgency of the challenges addressed by Deng Xiaoping in the late 1970s. But its main focus is how the resulting Chinese growth miracle presents President Xi Jinping with four transitional imperatives: the shift from export- and investment-led growth to an economy driven increasingly by domestic private consumption; the shift from manufacturing to services; the shift from surplus saving to saving absorption in order to fund the social safety net desperately needed by China’s rapidly aging middle class; and the shift from imported to indigenous innovation, which ultimately will be decisive for China’s goal of being a “moderately well-off society” by the middle of this century.

The confluence of these four transitional challenges would be daunting for any country. That is especially true for China, with its blended political economy – the so-called socialist market system, with an ever-changing balance of power between the Communist Party and a vibrant private sector. It is a very tricky balancing act, to be sure.

I date the pivotal point on the path from Old China to the Next China to early 2007, when then-Premier Wen Jiabao correctly diagnosed the high-flying Chinese economy of the time as increasingly “unstable, unbalanced, uncoordinated, and unsustainable.” The Four Uns, as they famously came to be known, sparked a vigorous internal debate in China that led to major rethinking of the Chinese economic-growth model and a series of new strategic plans and reforms – the 12th and 13th Five-Year Plans (of 2011-15 and 2016-20, respectively) and the so-called Third Plenum Reforms (of late 2013).

Notwithstanding all the criticism of China in the West (to say nothing of the bipartisan political angst now boiling over in Washington, DC), progress on the road to the Next China actually has been quite extraordinary over the past dozen years. The middle-class Chinese consumer has come to life, and the services sector has emerged as an increasingly powerful growth engine.

China’s outsize current-account surplus has all but vanished, a trend that is crucial to the saving absorption that its domestic economy requires. And the signs of indigenous innovation are everywhere, from e-commerce and fintech to artificial intelligence and breakthroughs in the life sciences.

True, like all sagas of economic development, China’s progress since 2007 has been uneven at times, and new challenges have emerged along the way. Wen’s Four Uns provide a useful way to frame the pitfalls that still lurk. Instability remains an ever-present threat, underscored by China’s voracious appetite for debt, which has sparked an aggressive deleveraging campaign aimed at avoiding the dreaded Japan syndrome.

Imbalances persist, underscored by private consumption’s sub-40% share of Chinese GDP – a shortfall that can be addressed only by a more robust social-safety net (especially pensions and healthcare). Persistent regional disparities, in conjunction with mounting income inequality, are visible manifestations of a lack of coordination. And, of course, despite recent progress in dealing with air pollution, environmental degradation remains central to China’s challenging sustainability agenda.

But the trade conflict with the United States is a new and important sustainability challenge for China. Despite years of denial, there can no longer be any doubt that the US is pursuing a containment strategy vis-à-vis China. From an ever-escalating tariff war and the weaponization of trade policy by blacklisting leading Chinese technology companies, to Trump’s “order” to US companies to cease doing business with China and Vice President Mike Pence’s declaration of a new Cold War, the US political establishment has swung dramatically from viewing China as an opportunity to regarding it as an existential threat. And public sentiment has followed suit. A recent survey by the Pew Research Center found that fully 60% of Americans had an unfavorable view toward China — up 13 percentage points from 2018 and the most negative assessment of China since the Pew survey’s inception in 2005.

Forget about whether this about-face is justified. I am less concerned than most about the so-called China threat, but I understand the fear and anxiety that grips the doubters. The real problem is less the merits of the allegations than the deep inconsistencies of Trump’s policies to address them.

An anger-driven US president doesn’t seem to grasp that bilateral trade implies the possibility of prompt retaliation when one side imposes tariffs on the other. Nor does his administration show any understanding of the linkages between ever-expanding budget deficits, subpar domestic saving, and multilateral trade imbalances. On the contrary, it has embraced a China-centric bilateral fix for a multilateral problem just when America’s own lack of fiscal discipline virtually assures a widening trade deficit with the world at large.

And rather than view Huawei as a legitimate competitor in 5G telecommunications, Trump wants to put a chokehold on China’s leading tech company. Never mind the resulting value-chain disruptions, which would do great damage to US suppliers, or that targeting Huawei does nothing to address America’s own glaring lack of 5G capability.

Reminiscent of Don Quixote, Trump is tilting at windmills. His administration is flailing at antiquated perceptions of the Old China that only compound the problems it claims to be addressing. Financial markets are starting to get a sense that something is awry. So, too, is the Federal Reserve. Meanwhile, the global economy is fraying at the edges. The US has never been an oasis in such treacherous periods. I doubt if this time is any different.


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (Yale University Press).

What a devil’s advocate would tell ECB hawks

Their commitment to price stability requires them to back Draghi’s stimulus plans

Martin Sandbu




Since the early summer, Mario Draghi and his allies among the European Central Bank top brass have been laying the groundwork for new stimulus. Until recently, markets expected a punchy monetary package from this week’s ECB meeting, but hawkish talk from other central bankers in the last few weeks has muddied the picture.

In the disagreement within the ECB on what the economy needs, the doves have the better case, not least because the eurozone has only faced one of the three trade shocks about to hit it. But there is another reason why the hawks should rally behind the bank’s president this time round: it is in their own professed interest to do so.

Monetary hawks often see themselves as guardians of orthodoxy. So let them take inspiration from a much older bastion of orthodox thinking: the Vatican, which admits an advocatus diaboli to oppose the canonisation of putative saints. The analogy is not as far-fetched as all that: Bundesbank president Jens Weidmann has cited Mephistopheles’ alluring call for money-printing in a warning against it. In that spirit, here is how a monetary devil’s advocate might address the hawks at the ECB.

“Esteemed central bankers, let us leave aside the Keynesian arguments for countercyclical policy. Allow me instead to show how your own most cherished principles mean you must support a strong stimulus this week.

First, you rightly pride yourself on taking seriously the ECB’s legal mandate to protect price stability. But that is precisely what the ECB has been failing to do, despite the unprecedented measures taken in the last few years, sometimes against your advice.

Since January 2013, eurozone prices have gone up by only about 1 per cent a year on average. In those 80 months, inflation has only come in at 2 per cent or more four times. Strip out energy, largely driven by global developments, and inflation has not touched 2 per cent for more than a decade.

Your own definition of price stability is that prices should be rising stably at a rate just under 2 per cent per year. You may have preferred one or zero, but that is the rule which you are asking the public to rely on. The eurozone price level is 7 per cent lower today than those who trusted the ECB expected in early 2013. This is not stability, but a downward instability that distorts the decisions of businesses and households who need to know where prices are headed to plan.

Second, you worry about your countries’ savers. There are many of them, because as a hawk, you are likely to come from an economy that saves more than it spends or invests, and exports its surplus savings elsewhere. Those savers complain about the low returns on keeping their money in the bank.

But the downward drift of prices from your target has hurt borrowers, not savers. A lower-than-intended price level makes repaying loans more expensive than expected in real terms. The savers who ultimately provided the loans have been left with an unearned windfall, courtesy of you. Besides, you are guardians of price stability for the whole economy, not just those with money in the bank.

Third, you think that easy monetary policy makes for government profligacy. In a narrow sense, you feel central bank purchases of government bonds are a form of legally dubious ‘monetary financing’. But as someone who cares about the legal rules, you should defer to the judges. The EU court has accepted ECB bond purchases in proportion to its monetary policy needs. That is the law.

More broadly, you worry that loose monetary policy erodes fiscal morality. When financing is cheap, the pressure is off to streamline the public sector and make the hard choices that improve growth in the long run, you think. This is not the time to rehash the experience with austerity in the eurozone. Instead, consider whether ‘virtuous’ budget restraint is really what you want.

Back home, you may find a media and political debate that rails against incontinent spending in other countries. But it also rails against the effects of loose monetary policy. In your wisdom, you know perfectly well they cannot have it both ways. It is because public budgets have contributed nothing to aggregate demand since the crisis that the ECB has had to take the steps you dislike. It is an excess of public virtue that has led to the punishment of individual savers — and, let me add, returned you to the uncomfortable position of participating in monetary loosening once again.

So why not make your own job easier by pushing for more deficit spending by eurozone governments? At home, you can burnish your hawkish credentials by explaining that you would love to see higher rates, and for that to happen (given your legal mandate) governments must spend more or tax less.

In the eurozone institutions, you can lend your weight to the growing debate for a looser fiscal stance. When a new president takes the helm, one of her first tasks will be to put the ECB’s authority behind a push for more active fiscal policy. If your qualms about loose money are genuine, the best you can do is support her. Your hawkish credentials will make that support count for more than more predictable voices.

You dislike the tools by which the ECB engineers a loosening. But your respect for the law, concern for savers and your distaste for loose money are all best satisfied by supporting monetary stimulus today and fiscal stimulus tomorrow.

With that, I rest my case.”

Trump Calls for Below-Zero Interest Rates in the U.S., Labels Fed ‘Boneheads’

By Nicholas Jasinski


President Donald Trump. Photograph by Win McNamee/Getty Images


No, it wasn’t Tesla CEO Elon Musk berating a sell-side analyst for asking about the electric car maker’s capital requirements on an earnings call. In a series of tweets early Wednesday, President Donald Trump wrote that “boneheads” at the Federal Reserve should lower interest rates to zero or below so that the U.S. could decrease its borrowing costs.

“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” Trump wrote. “INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet.... The USA should always be paying the the [sic] lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of ‘Boneheads.’”

The U.S.’s debt load is currently more than $22.5 trillion, according to the U.S. Treasury, while interest expenses reached about $325 billion last year.

The Federal Open Market Committee lowered its benchmark interest rate target in late July for the first time since the financial crisis, to a range of 2.00% to 2.50%. The Fed’s rate-setting panel next meets Sept. 17-18, with futures-market pricing showing an almost-90% probability of another quarter-point cut.

Chairman Jerome Powell and other Fed officials have pointed to slowing economic growth abroad, U.S.-China trade policy uncertainty, and persistently low inflation as reasons for easing monetary policy. Central banks around the world have likewise been lowering interest rates this year.

The Federal Reserve Resistance

A recent official urges the central bank to help defeat Donald Trump.

By The Editorial Board


William Dudley in 2018. Photo: ashlee espinal/Reuters 


Perhaps you’ve seen former Chairs of the Federal Reserve defending the central bank’s independence and foreswearing all political intentions. Fair enough. But then what are we to make of former Fed monetary Vice ChairWilliam Dudley ’s marker that the Fed should help defeat President Trump in 2020? That’s the extraordinary message from the former, and perhaps future, Fed grandee in Bloomberg.

“Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions,” Mr. Dudley asserts. We also think monetary policy should focus on prices rather than trade. But Mr. Dudley seems to be saying the Fed should do nothing to assist the economy even if it heads into recession. Then he goes further and essentially says the Fed should join The Resistance.

“There’s even an argument that the election itself falls within the Fed’s purview,” Mr. Dudley writes. “After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”

Wow. Talk about stripping the veil. These columns wondered if Mr. Dudley was politically motivated while he was at the Fed, favoring bond buying to financeBarack Obama ’s deficit spending, urging the Fed to intervene in markets to boost housing, and keeping interest rates low for as long as possible. And now here Mr. Dudley is confirming that he views the Fed as an agent of the Democratic Party.

None of this helps current Fed ChairJerome Powellnavigate monetary policy in a tricky political moment. Mr. Dudley may be in private life now, but he left the Fed as recently as 2018. Urging his recent colleagues to act politically now will feed President Trump’s conviction that the central bankers have it in for him even if their monetary decisions are based on sound economic judgments. He will also damage the Fed’s ability to rally Congress and the business community to its defense.

Perhaps Mr. Dudley is angling to become the next Fed Chair if Mr. Trump is defeated. But his partisan, reckless op-ed should disqualify him from any consideration.

The US, China and Japan: Grand Strategies

All three countries are competing for power in the Pacific.

By George Friedman

(click to enlarge)