Draghi powerless on ECB path toward QE without reforms

Looking out from the top of the European Central Bank’s new tower in Frankfurt, it’s easy to find dark clouds on the horizon.

The view for policy makers is of a eurozone populace so weary of years of economic turmoil that it’s increasingly electing politicians who say no to pan-European cooperation, and spurn reforms that the ECB says are vital to revive the economy. Trapped by their mandate to prevent deflation, officials fret they might soon be forced to roll out quantitative easing that can never succeed by itself.

In speech after speech, central bankers led by President Mario Draghi have urged governments from Paris to Rome to complement ECB stimulus by overhauling economies and bolstering investment. The response — national foot-dragging on reform and an infrastructure plan from European Commission President Jean-Claude Juncker that won’t deliver spending until well into next year — has disappointed.

“The ECB might just be powerless,” said Daniel Gros, Director at the Centre for European Policy Studies in Brussels. “There are domestic political constraints about which, at the EU level, they can do nothing. The crowd which is yelling for stimulus is basically southern Europe. They say the ECB should do its duty, whatever the governments do.”

That tussle provides another dimension to Draghi’s pressure on policymakers as they prepare for their meeting this week. He said on Nov. 21 that officials should stoke inflation “as fast as possible.”

ECB urgency

“We do see a degree of urgency in acting, which does not apply only to monetary policy,” ECB Executive Board member Benoit Coeure said on Bloomberg Television on Nov. 24. “There is urgency in addressing the labor market issues in the eurozone, in creating jobs. That’s the only way to reconcile the European people with the European project.”

From the core of the euro region in France, to Greece on its periphery, governments find themselves hamstrung by the growing popularity of protest parties. That’s limiting their room to push through unpopular changes such as making it easier to shift workers from unproductive jobs to re-training, or raising the age of retirement. The threat of early elections in Greece, Catalonia, Italy and Austria, leaves the ECB looking on in dismay as a small window of opportunity for action narrows.

Francois Hollande, the least popular president in modern French history, is haunted by the success of Marine Le Pen’s National Front whose anti-immigration and anti-European Union stance won the most votes in May’s European elections. He is also wary of being outflanked as former president Nicolas Sarkozy rallies the center-right opposition with rhetoric that counters the sort of cooperation that the ECB wants.

Sarkozy’s lament

“The European Union has grabbed too many powers,” Sarkozy told supporters last week, in an opening salvo before a presidential election scheduled for 2017.

In Greece, the main opposition anti-bailout party that emerged out of the debt crisis, SYRIZA, leads in opinion polls and wants early elections. Spain’s unemployment at 24 percent is second only to Greece in the euro area, and Podemos, an anti-establishment group formed in the past year, is more popular than either of the two main parties that have shared power since the 1980s.

As for Italy, Draghi’s home country and an economy that’s in its third year of contraction, reform attempts by Prime Minister Matteo Renzi are hampered by Beppe Grillo’s Five Star Movement, an anti-establishment party that came second in the European elections. Efforts to overhaul labor rules to make it easier to hire and fire workers have triggered protests.

Draghi’s solution

Draghi’s solution to Europe’s political paralysis and economic malaise is the opposite of what the anti-EU parties argue for.

There’s “lack of confidence in the future and lack of trust between member states,” he said in September. “There’s a strong case for sovereignty over relevant economic policies to be exercised jointly.”

The EU answer is Juncker’s investment plan, unveiled on Nov. 26, which aims to use 16 billion euros ($20 billion) from the EU budget and 5 billion euros in start-up cash from the European Investment Bank, leveraged to support infrastructure projects of 315 billion euros. It doesn’t require member nations to commit new money, and will take time to implement. Draghi has welcomed it, while urging a fast deployment.

“Europe needs it now,” said Gregory Claeys, a research fellow at the Brussels-based policy group Bruegel. “We are now in stagnation, we now have low inflation and we have a huge unemployment problem.”

No help

Electorates aren’t helping out the politicians, or the ECB. At least 70 percent of respondents in an EU Commission survey in October said there’s a need for “significant” reforms to improve economic performance, but when it came to the detail, readiness to change evaporated. Asked if the retirement age must be raised to ensure sustainability of pensions, almost three quarters said no.

The political atmosphere makes the ECB, once again, the only institution that can prevent a bad situation from deteriorating, said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London.

“What would be a game changer for the ECB is a ‘structural compact,’ with countries ceding sovereignty,” he said. “But that’s not going to happen. So the worst equilibrium is inaction on both sides.”

The question for Draghi and the Governing Council at the Dec. 4 decision is whether to move toward broad-based sovereign-bond purchases, quantitative easing, regardless of what governments do or don’t do. Inflation at 0.3 percent has left the ECB with the onus to act to reach a goal of just under 2 percent, and officials suggest they might commit to QE early next year.

“The fact that for example, France isn’t reforming yet, can’t be a reason for the ECB not to fulfill its mandate,” said Holger Schmieding, chief economist at Berenberg Bank in London. “We have very low inflation and a very low inflation outlook. It’s the ECB’s job to address that.”