The Wall Street Journal - 13.09.2019

A6| Friday, September 13, 2019 ** THE WALL STREET JOURNAL.

Sources: Eurostat, Commerce Department

Industrialproduction,

changefromayearearlier

U.S.

Eurozone

10.

–5.

–2.

0

2.

5.

7.

%

2014 ’15 ’16 ’17 ’18 ’

BYBOJANPANCEVSKI

The European Central

Bank’s decision to lower its

key interest rate further be-

low zero while relaunching an

asset-purchase program

means monetary policy in Eu-

rope is now even more stimu-

lative than in the U.S.

The Federal Reserve cut its

benchmark rate by a quarter

percentage point in July and

is poised to do so again next

week, which would lower the

rate to a range between 1.75%

and 2%. That would be well

above the ECB’s key rate,

which will drop to minus

0.5%.

Economic Growth

Behind this divergence: The

U.S. economy is stronger than

the eurozone’s, which means

there is less reason for the

Fed to boost growth.

Overall economic growth

has been stronger in the U.S.

than in Europe since mid-2017.

While growth faltered in the

eurozone beginning in the

first quarter of 2018, it has re-

mained solid in the U.S.

Inflation

A central bank’s main job is

to maintain slow and steady

inflation to keep the economy

humming along. The Fed tar-

gets a 2% rate while the ECB

seeks a level close to but just

under 2%. Inflation has been

weak in both economies lately

but it has come closer to the

Fed’s goal.

Manufacturing

The global economic slow-

down has had a bigger effect

on manufacturing in the euro-

zone, which is more export-

driven. That has contributed

to Europe’s weakening econ-

omy and helped spur the

ECB’s latest move.

BYDAVIDHARRISON

ANDPAULHANNON

Bank’sMove

Highlights

Divergence

In Growth

Note: The Fed sets rates in a quarter

percentage point range; The ECB rate will drop

to -0.5% on Sept. 18.

FederalReserveand

ECBpolicyrates

3

• 1

0

1

2

%

2014 ’ 15 ’ 16 ’ 17 ’ 18 ’ 19

Fed(upperlimit)

ECB

Sources: Federal Reserve, European Central Bank

QuarterlychangeinGDP,

annualized

Sources: Eurostat, Commerce Department

6

• 
  

0

2

4

%

2014 ’15 ’16 ’17 ’18 ’

Eurozone

U.S.

Sources: Eurostat, Commerce Department

Inflation,changefromthe

previousyear

2.

0.

0.

1.

1.

1.

1.

2.

%

2014 ’15 ’16 ’17 ’18 ’

U.S.

Eurozone

WORLD NEWS

Germans Snub ECB Spending Plea

Bank chief Draghi’s call

for eurozone’s leading

economy to ease policy

draws silence, criticism

German GDP slipped in the second quarter and is expected to fall again in the third. Above, a Porsche production line in Stuttgart.

MICHAELA HANDREK-REHLE/BLOOMBERG NEWS

purchase. Without changing

rules that prohibit the bank

from buying more than a third

of any government’s debt, Mr.

Ducrozet estimated that the

ECB can continue its bond pur-

chases for only 9-12 months.

At least five officials on the

ECB’s 25-member rate-setting

committee opposed the deci-

sion to restart QE, including

the governors of the Dutch,

French and German central

banks, people familiar with the

matter said. Two members of

the ECB’s executive board—Sa-

bine Lautenschlaeger and Be-

noit Coeure—also opposed the

move, the people said.

Mr. Draghi said, “There was

no appetite to discuss limits,

because we have the headroom

to go on for quite some time

without raising the discussion

about limits.”

Some have questioned

whether the fresh shot of stim-

ulus will succeed in protecting

the eurozone economy from an

international trade war that

shows little sign of abating.

With borrowing rates in the

eurozone already exceedingly

low, the economy won’t benefit

much from the latest moves,

Mr. Draghi’s critics said.

reacting to a longer-than-ex-

pected slowdown in the euro-

zone and persistently weak in-

flation. “We still think that the

probability of a recession in

the euro area is small, but it

has gone up,” Mr. Draghi said.

The eurozone economy’s

growth has slowed to less than

1%, half the pace of the U.S.

Europe has been hit hard by

international tensions around

trade because of its reliance on

exports, with Germany—the re-

gion’s economic powerhouse—

particularly vulnerable. The

bloc also faces the possibility

of a disorderly exit from the

European Union by the U.K., a

prospect that could seriously

disrupt business and finance.

Crucially, ECB officials were

divided over the decision to re-

vive QE. That stimulus pro-

gram is particularly conten-

tious in parts of Northern

Europe due to concerns that it

subsidizes spendthrift govern-

ments in the south of the re-

gion.

Reflecting those divisions,

officials decided not to enlarge

significantly the pool of assets

the bank can buy—though it

did expand the kinds of corpo-

rate and mortgage bonds it can

only phased out in December.

The new QE program is ex-

pected to “run for as long as

necessary,” and only to end

shortly before the bank starts

raising interest rates, the ECB

said.

The ECB also promised not

to raise interest rates “until it

has seen the inflation outlook

robustly converge” with its

target of just below 2%. Thurs-

day’s cut was the ECB’s first

since March 2016.

“Mario Draghi delivered a

more aggressive easing pack-

age than most observers ex-

pected, and one of the best

outcomes possible in the cur-

rent political context,” said

Frederik Ducrozet, an econo-

mist with Pictet Wealth Man-

agement in Geneva.

Mr. Draghi said at a news

conference that the ECB was

interest rates in recent weeks

amid a bitter trade dispute be-

tween the U.S. and China, a fall

in trade volumes and a slow-

down in global growth.

Second-quarter figures re-

leased Thursday by the Organi-

zation for Economic Coopera-

tion and Development showed

year-to-year economic growth

in the Group of 20 leading

economies was at its weakest

since the start of 2013.

The Fed is expected to cut

its key interest rate by a quar-

ter percentage point next

week, following a similar cut in

July, its first since 2008. The

ECB’s move ramps up pressure

on the Fed to follow suit.

The Fed rate would still be

far higher than the ECB’s,

highlighting the divergence in

economic fortunes between

Europe and the U.S., with the

Fed having less a need to boost

growth for the stronger U.S.

economy.

The ECB said it would cut

its key interest rate by 0.1 per-

centage point, to minus 0.5%,

and buy €20 billion ($22 bil-

lion) a month of eurozone

debt starting in November, re-

launching a so-called quantita-

tive easing program that it

a year.
Investors initially cheered
the surprise move as they an-
ticipated the return to bond
markets of an 800-pound go-
rilla, sending the euro down
against the dollar and bidding
up the prices of eurozone gov-
ernment debt. But those gains
later reversed as Mr. Draghi
highlighted divisions within
the ECB’s rate-setting commit-
tee over its future course.
In a tweet, Mr. Trump wrote
that the ECB was “trying, and
succeeding, in depreciating the
Euro against the VERY strong
Dollar, hurting U.S. exports.”
The Republican president has
repeatedly criticized the Fed-
eral Reserve for being less ag-
gressive than the ECB.
The ECB joins central banks
around the world, including
the Fed, that have been cutting

Continued from Page One

Bank Acts

To Boost

Eurozone

with healthy state finance to

spend more. While she didn’t

address Germany by name,

she pointed to the need some

countries had in investing in

broadband internet net-

works—an area where Ger-

many is known to be lagging

behind other developed na-

tions.

“It has been the case—and I

said it as managing director of

the IMF—that some countries

in the euro area can actually

use some of their fiscal space

in order to improve broadband

infrastructure and set in place

the public spending that will

actually help fight the reces-

sion,” she said.

economists have urged Berlin

to use a Green policy package

to be unveiled late next week

as a vehicle to pump money

into the economy, for instance

via incentives to buy electric

cars or insulate homes.

Mr. Draghi, who was hold-

ing his penultimate press con-

ference as ECB president, will

be succeeded by Christine

Lagarde, the former managing

director of the International

Monetary Fund. But Ms.

Lagarde has made it clear she

would keep the pressure on

Berlin.

During her confirmation

hearing on Sept. 4, Ms.

Lagarde urged governments

production contracted 5.3% in

July, according to data re-

leased on Thursday, the steep-

est drop in the eurozone, with

the important car sector

shrinking even more.

The fallout of the U.S.-China

trade dispute and Britain’s

pending departure from the

European Union have put addi-

tional strain on Europe’s larg-

est economy, which is heavily

reliant on exports. Yet politi-

cians are adamant that they

will ramp up borrowing only

once the country is firmly in a

recession, unemployment

starts rising, and corporate-tax

revenue falls.

German and international

ist monetary policy is doing

more damage than good. The

negative effects of this policy

are becoming overwhelming

while the positive effects are

wearing off,” he said.

Before Mr. Draghi’s an-

nouncement, leading politi-

cians including Chancellor An-

gela Merkel had said Germany

didn’t need to let its budget—

which has been in surplus

since 2014—slide into a deficit

to support the economy.

But Germany’s gross domes-

tic product dropped 0.1% in the

second quarter and is expected

to fall again in the third quar-

ter, which would put the coun-

try in a recession. Industrial

BERLIN—European Central
Bank President Mario Draghi
reiterated his call for Germany
to boost spending in support
of the ailing eurozone econ-
omy, drawing criticism from
German media and financial-
sector executives even as Ber-
lin ignored the plea.
The German government
has shown little interest in
scrapping fiscal orthodoxy de-
spite the threat of a recession,
and Thursday’s criticism of Mr.
Draghi cited lower financial-in-
dustry profit and returns on
ordinary Germans’ savings.
A nearly decadeslong tug of
war between international in-
stitutions that have urged Ger-
many to open the public purse
to stimulate demand and a
government that has stub-
bornly stuck to budget sur-
pluses and high taxes has in-
tensified this year as the long-
healthy German economy
showed signs of an impending
recession.
“In view of the weakening
economic outlook and the con-
tinued prominence of down-
side risk, governments with
fiscal space should act in an
effective and timely manner,”
Mr. Draghi said, reiterating a
now-familiar line.
“Now is the time for fiscal
policy to take charge,” he
added, after singling out Ger-
many and the Netherlands as
examples.
Amid silence from Berlin,
Helmut Schleweis, head of the
German Savings Banks Associ-
ation, said the ECB’s ultra-easy
money policy was melting
away savings, creating a prop-
erty bubble and pushing rents
and housing prices up.
“The even more expansion-

Thursday that the ECB is “try-

ing, and succeeding, in depreci-

ating the Euro against the

VERY strong Dollar, hurting

U.S. exports.”

A rate cut “opens the door

for Trump to come and accuse

the ECB of actively weakening

the currency,” Daniel Tenengau-

zer, head of markets strategy

and insights at BNY Mellon in

New York, said before the ECB

decision was announced.

But if that is the aim, suc-

cess could come at a price. The

further weakening of the euro,

which has been falling against

the dollar for almost 18 months,

risks enraging President Trump

and harming trade relations.

That could hurt the economy

if it prompts the White House

to, for instance, make good on

threats to impose tariffs on Eu-

ropean car makers.

Mr. Trump tweeted on

cause more European trade is

invoiced in euros and it is

mainly only oil or other energy

imports that are priced in dol-

lars.

If Europe’s problem is “an

external demand shock from

China, then the exchange rate

isn’t going to help,” Mr. Tenen-

gauzer said.

There are other problems,

too. Negative rates hurt bank

profits and at some point will

push lenders to charge more for

loans, the exact opposite of

what low rates are meant to

achieve. The ECB is also trying

to make things less painful for

banks by exempting them from

some of the costs, but this isn’t

straightforward.

The ECB’s own chief econo-

mist, Philip R. Lane, pointed

out in a speech last week that

negative rates have made a

smaller contribution than other

policy tools in managing infla-

tion since 2016.

Targeting the euro might

also be fighting a losing bat-

tle—and a policy mistake. Mr.

Tenengauzer doesn’t think the

euro is going to weaken to the

point where one euro buys one

dollar.

The central bank had to do

something because inflation is

low and falling: the latest read-

ing in July was just 1%, half the

ECB’s target level. But several

board members had questioned

the need for more bond buying,

or quantitative easing, ahead of

the meeting. Politically in Eu-

rope, cutting rates is easier,

even though they were already

negative.

FortheECB,ratecutsare

the tool of choice for influenc-

ing the exchange rate, as Mr.

Draghi laid out in another ma-

jor speech in Amsterdam in

2014.

But some think this policy

has stopped making sense. The

euro has fallen this year even

as inflation has tumbled, under-

mining the importance of their

connection. On a trade-

weighted basis, in which the

Chinese yuan and the British

pound are important alongside

the dollar, the euro is also

weaker than it was at the start

of the year, although it has

gained ground in recent

months.

The link between the euro

and inflation also has weak-

ened, say some observers, be-

The European Central Bank
launched a fresh wave of loose-
money policies Thursday to jolt
its stubbornly low inflation
rate. But many suspect its pri-
mary target was something
else: the euro.
The central bank cut interest
rates and revived a bond-buy-
ing program at President Mario
Draghi’s penul-
timate meeting.
The euro fell as
much as 0.5% against the dollar
initially on Thursday, but re-
versed course later to trade
0.2% higher.
While the ECB doesn’t target
specific levels for the euro, the
exchange rate has become a
policy focus because of fears
that currency strength quashes
inflation.
“This [focus on the euro] is
more true than it’s ever been,”
said Seema Shah, chief strate-
gist at Principal Global Inves-
tors. “Interest rates are so low
that any further cut is not go-
ing to have much of an impact
and runs the risk of making
things worse. So why bother?
Simply to target the euro.”

BYPAULJ.DAVIES

Weakening Currency Poses Risks to Europe

Changethisyearinthestrengthoftheeuroagainst:

Source: FactSet

*The ECB trade-weighted index

Chineseyuan

Currenciesofthe

eurozone'smain

tradingpartners*

U.S.dollar

1

• 5


• 4


• 
  


• 2
  
  
  • 1
  
  
  
  

0

%

Jan. Feb.March April May June July Aug. Sept.

The chance of a

recession in Europe is

small, but has risen,

Mr. Draghi said.

ANALYSIS