THE ECB IS ATTEMPTING TO GET AHEAD OF EVENTS / THE FINANCIAL TIMES EDITORIAL

The ECB is attempting to get ahead of events

With economic risks again mounting, the EU needs new instruments

The editorial board


The European Central Bank has promised to keep interest rates at their current record low until at least 2020 © Bloomberg


The European Central Bank’s U-turn this week — reviving part of its stimulus programme after two years of weaning the eurozone off easy money — took markets by surprise. It should not have done. Signs of eurozone weakening, especially in Germany, and in key partners such as China, had been evident for months. Once the US Federal Reserve signalled a pause before lifting rates again, the ECB became likely to follow suit. In his final months in the role, ECB president Mario Draghi is clearly trying to get ahead of events. Less clear is whether the bank has done enough, or has the means to do so, if the weakening continues.

The ECB’s downgrade of its eurozone growth forecast this year to 1.1 per cent, from 1.7 per cent just three months ago, reflects the scale of the uncertainties. Expectations of a strong expansion in the US this year have been scaled back. China, at its National Policy Council this week, lowered its target for economic growth in 2019 to a range of 6-6.5 per cent, from a hard target of 6.5 per cent in the past two years — in part because of its economic and trade frictions with the US.

Despite signs that Washington and Beijing might be near an agreement to end their current spat, trade tensions could easily flare elsewhere. The risk remains that US president Donald Trump might slap tariffs on cars and components from the EU, dealing a severe blow to the German and broader European economy. As the UK parliament prepares for crucial Brexit votes next week, a calamitous no-deal crash-out from the EU can still not be ruled out.

In response, the ECB has promised to keep interest rates at their current record low until at least 2020. While it stopped expanding quantitative easing in December, it has indicated it will keep constant the amount of financial securities it acquired under QE until after rates begin to rise. Taken together, that constitutes a delay to the moment when “quantitative tightening” will finally begin.

By promising a new round of cheap long-term loans to banks willing to expand lending, moreover, the ECB will enable Spanish, Italian and other banks to roll over funding they have already received, some of which is set to mature.

Such measures are sensible and welcome. If risks are contained and the economy stabilises, they may be sufficient. But the combination of persistently low core inflation and weak growth leaves the eurozone highly vulnerable. One sizeable negative shock could tip it again into recession, with knock-on effects that could once more strain the integrity of the single currency. Even while hoping for the best, therefore, eurozone authorities must prepare for the worst — to ensure rapid action can be taken if required.

In reality, there is little more the ECB itself can do. Political hostility from some EU capitals, plus legal constraints on how much of any one country’s debt it can acquire, make it difficult to restart asset purchases. Other EU institutions and governments must therefore be ready to do more.

Germany is already taking the right steps by raising wages. Other solvent governments should also be raising spending. One measure the EU could be preparing is a substantial, high-quality investment programme in green energy and infrastructure to provide both near-term stimulus and lasting benefits. The EU’s European Investment Bank could be used for such a purpose. If it printed bonds backed by all member states, there is no reason the ECB should not buy them.

If they are to ensure the future safety of the euro, EU policymakers need to put more instruments at their disposal.