On Thursday 25 October, the President of the European Central Bank, Mario Draghi, took pains to find the words to reiterate the importance for the Eurozone countries of complying with the Stability and Growth Pact, whilst avoiding exacerbating market concern over the solidity of the Italian banks, against the backdrop of a quarrel between Rome and the EU over the draft Italian budget for 2019.
“The broad-based expansion calls for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions”, Draghi said, following the meeting of the Governing Counsel.
The elements weighting down the health of economic growth include American protectionism, the consequences of Brexit and Italy, he said.
Even so, the former Governor of the Bank of Italy said that he was “confident that an agreement would be found” between the Italian authorities and the European Commission, with Rome having been invited on Monday to review its budgetary copy for 2019 within the next three weeks (see EUROPE 12123).
Draghi noted that the increase in interest rates on Italian sovereign debt instruments had led to a moderate increase in the costs of borrowing for households and businesses.
“This will have an effect on credit and ultimately on growth (…). If the interest rates keep going up, the room available to expand the budget gets smaller”, he said. He went on to acknowledge that the fall in value of Italian instruments would unavoidably have a negative effect on the solidity of the Italian banks which own them.
Although it keeps the nominal deficit below 3% of GDP, the Italian budget for 2019 anticipates a deviation of 1.5% of GDP from the initial objective of reducing the structural deficit by 0.6% (not including cyclical effects), all in a context of government debt of more than 130% of GDP.
As regards the possibility of contagion to other Eurozone states, Draghi noted an increase in interest rates on certain sovereign debts, without being able to clarify whether this was due to internal factors in the countries in question or the Italian budgetary situation.
The ECB President also rejected any dependence of the Frankfurt-based monetary institute on the budgetary situation of his country. He reiterated that any intervention of the institute in the framework of the 'OMT' operation to buy back sovereign bonds should take place within the framework of a financial bailout plan specific to a given Eurozone country.
This is why, pursuing its mandate of keeping inflation close to below 2% in the medium term, the ECB reiterates its intention to end the 'quantitative easing' (QE) operation for the mass buyback of mainly public debt instruments at the end of this year. In November and December, the pace will fall to €15 billion per month.
In 2019, the ECB monetary policy will remain largely accommodative, Draghi said, through its policy of reinvesting securities reaching maturity and carrying out forward guidance on the key lending rates, which will remain at their current very low levels until at least next summer.
On Thursday 13 December, the Council will discuss the future of monetary policy on the basis of the latest economic data.
It is worth noting that at the beginning of next year, the ECB will adjust the distribution key of the capital of the European institution, again to take account of Brexit. (Original version in French by Mathieu Bion)