14 Leaders The EconomistSeptember 7th 2019
12 retail sales are already slipping and firms are planning to hire
fewer workers.
Inflation is dangerously low. Both the headline figure and the
“core” measure—which strips away volatile food and energy
prices—are stuck at around 1%, below the ecb’s target of infla-
tion below, but close to, 2%. Investors’ medium-term expecta-
tions, as measured by swap rates, have drifted down to 1.2%, well
below levels in 2014-15, when the bank prepared to launch qe.
The views of professional forecasters surveyed by the ecbhave
fallen to their bleakest since polling began in 1999. In an attempt
to bolster its credibility, the bank has tweaked its language to
emphasise that it does not want to undershoot the target of 2%
consistently. But without action, those words count for little.
Some economists, among them Larry Sum-
mers of Harvard University, argue that, with lit-
tle ammunition left, central banks should re-
frain from action so as to force governments to
step into the breach with fiscal policy. They are
right that the root cause of the economic woe is a
shortfall of demand. Sovereign borrowing costs
in much of the euro area are near zero or below
it. In an ideal world governments would leap at
the chance to borrow so cheaply in order to invest. And it is also
true that monetary policy is likely to be less effective because
rates are so low. The ecb’s deposit rate is already -0.4%. At some
point the benefits of further cuts will be offset by their costs, for
example if customers begin to withdraw funds from banks and
thus destabilise them. With financial conditions already much
looser, qewill not be as effective as it was in 2015.
But for the ecb to stand back and do nothing would be irre-
sponsible. It is legally obliged to achieve price stability. Ger-
many’s government shows little appetite to borrow to spend,
even if its entire bond yield-curve is submerged below zero.
There is even less sign of co-ordinated regional fiscal stimulus inthe offing. Until governments loosen the purse-strings, the ecb
has no choice but to act. It is the only game in town.
Mr Draghi must therefore be bold on September 12th. Al-
though the scope for interest-rate cuts is limited, it still exists.
The important thing is to mitigate the impact on financial stabil-
ity by, say, “tiering” deposit rates—giving banks a rebate on some
of the interest they would otherwise have to pay to park spare
cash with the central bank. This would signal that the ecbcan cut
rates further without blowing up the banking system.
He should also restart qeand commit the bank to buying
bonds until underlying inflation shows a meaningful recovery.
Mr Draghi has said before that he views asset purchases as partic-
ularly helpful in reviving inflation expectations. One constraint
is the ecb’s self-imposed limit on the share of a
country’s government bonds that the bank can
buy. This should be lifted from a third to a half,
sending a powerful signal that the ecbmeans
business. The legality of qeis still being ques-
tioned in Germany’s constitutional court, but a
ruling by the European Court of Justice last year
appears to give the ecbroom to raise those lim-
its in its quest for price stability. The promise of
lower borrowing costs for longer might even prompt national
treasuries into issuing more debt.
Last, Mr Draghi must use the bully pulpit to urge governments
to exercise their fiscal powers to fend off a recession. You might
think that he should avoid taking action at the end of his tenure,
so as not to bind the hands of his successor, Christine Lagarde.
Not so. A determined response now will save her much work lat-
er. Mr Draghi is in a unique position. His stature with investors
and governments gives him real clout. And since he departs in a
few weeks he can be blunter than he has been in putting across
the message that governments, not just the ecb, must act. That
would cement his legacy as the man who saved the euro. 7Euro-area consumer prices
% change on a year earlier2017 18 190123CoreTar g e t HeadlineB
efore he becamepresident of Argentina in 2015, Mauricio
Macri was president of a Buenos Aires football club, Boca Ju-
niors. On September 1st the team faced its crosstown adversary,
River Plate, in the superclásico, as contests between the sides are
called. The two armies of fans at last had something to agree
about. As they made their way to the stadium, Mr Macri’s govern-
ment announced an emergency reimposition of currency con-
trols. Almost everyone believes that the new policy marks the
end, in effect, of his time in office. It also confirms the horrible
reality that Argentina has once again become a financial outcast.
The controls limit the amount of dollars that Argentines can
buy and force exporters to repatriate their earnings. They come
shortly after the government said it would delay repayments of
some of its short-term debt and seek an extension of longer-term
liabilities. Intended to prevent capital flight and stabilise the
peso, the measures are the final humiliation for Mr Macri, a busi-
nessman who promised to revive the economy by scrapping con-
trols and reforming a bloated public sector.
Foreign investors bought into his liberalising vision after the2015 election, with Wall Street chiefs such as Jamie Dimon, boss
of JPMorgan Chase, proclaiming that Argentina had come in
from the cold. And when the financial markets became choppier,
in 2018, the imfbacked him with $57bn, its largest-ever loan. A
year on, the position could hardly be worse. Inflation is over
50%. The peso has dropped by 30% in the past 12 months, and the
country’s dollar bonds trade at less than half their face value.
Plenty of Argentines and some outsiders may conclude that
Mr Macri’s agenda to liberalise the economy, and the imf’s sup-
port, were misplaced. In fact much of the blame for Mr Macri’s
failure lies with his populist predecessor, Cristina Fernández de
Kirchner, who is running again in the upcoming elections as a
vice-presidential candidate. Ms Fernández left behind a gaping
budget deficit, artificially low utility prices, statistics that were
brazenly manipulated and ruinously high public spending. After
years of such mismanagement it has become ever harder to per-
suade Argentines that prices and the currency will be stable.
Their mistrust of their economic institutions is sadly self-vindi-
cating. It makes investors unusually skittish. Who would trust aA superclassic crisis
Populists, not reformers, deserve most of the blame for Argentina’s latest fiascoArgentina