On Thursday 13 September, the President of the European Central Bank (ECB), Mario Draghi, levelled a thinly-veiled warning at Italy, a Eurozone country in which the cost of borrowing has risen due to uncertainty surrounding the economic policy of the Conte government.
“Our mandate is price stability under mid-term (…), not to ensure that government deficits will be financed under any conditions”, he said in response to certain voices in Italy that have expressed concern at the scheduled end, in December, of the operation for the mass buyback of mainly public securities (quantitative easing, or QE).
QE, which was launched to overcome the risk of deflation due to the post-financial crisis recession, has also helped to bring interest rates on the sovereign debt of all Eurozone countries down to record lows. If the Conte government applies its programme as it stands, there is the risk that the Italian deficit will get out of control and borrowing costs in Italy will rise still further.
“Words have changed many times. Now we are waiting facts. The main fact is now budget law and the subsequent parliamentary discussion”, said Draghi, observing in passing that the words spoken had already done damage to households and firms. The former governor of the Bank of Italy went on to note that the Italian episode had not, at this stage, had any repercussions anywhere else in the Eurozone.
With the draft 2019 Italian budget to be submitted to the European Commission by mid-October (see EUROPE 12091), the ECB President is currently standing by the commitment taken by Conte and several ministers to respect the Stability Pact.
Earlier in Paris, the Commissioner for Economic and Financial Affairs, Pierre Moscovici, discussed the Italian economic and budgetary situation. “Italy is the subject I want to focus on above all”, he said. These words gave rise to a media frenzy when they were reported as having referred to Italy as the 'problem of the Eurozone'.
“When we ask Italy to continue budgetary cleansing, this is because it is in its interests to continue to bring down its very high government debt, which is negatively affecting the country's ability to invest to the benefit of its citizens and is weakening investors' confidence”, the Commissioner added, pointing out that Rome had benefited from “all the flexibility available under the Pact”.
End of QE confirmed for end of 2018
Draghi furthermore confirmed that through the quantitative easing programme, the monetary institute would acquire €30 billion in debt instruments up to the end of September. Beyond that and if the medium-term inflation trajectory perspectives are confirmed, the pace will fall to €15 billion until the end of December, when QE will definitively end.
“Our monetary policy will remain largely accommodative” through our policy of reinvesting instruments reaching maturity and forward guidance on the key interest rates, said the ECB President. These rates, moreover, will remain at their current very low levels until summer 2019 at the earliest.
On the economic front, Draghi said that the current expansion was still very broad-based. Following two consecutive quarters of growth at 0.4% of GDP in the Eurozone, the monetary institute has dropped its growth forecasts for 2018 and 2018 slightly, now predicting growth in GDP of 2.0% in 2018, 1.8% in 2019 and 1.7% in 2020.
Protectionism is referred to as a major downwards risk. Depending on the scale of the phenomenon, this will have a negative impact on confidence and the organisation of the international value chain. The vulnerability of emerging markets such as Turkey and Argentina and the volatility of certain financial markets constitute other sources of concern.
On medium-term inflation, Draghi said that uncertainty remained. The monetary institute has not changed its forecasts, continuing to anticipate an increase in prices of 1.7% in 2018, 2019 and 2020.
Concerning the announcement by the President of the European Commission, Jean-Claude Juncker, the day before (see EUROPE 12094), of proposals aiming to bolster the role of the euro in international transactions, the President of the ECB said that he was interested in this and prepared to take part in the discussions.
Finally, when asked about the tenth anniversary of the collapse of the American merchant bank Lehman Brothers, he said he hoped that the regulators are acting to make the shadow banking sector as solid as the traditional banking industry. He repeated the recent warning of his predecessor, Jean-Claude Trichet of France, that the current level of indebtedness could foreshadow a return to crisis. (Original version in French by Mathieu Bion with Lucas Tripoteau)