The big monetary policy event over the month was the increase of monetary stimulus announced by the ECB after two years of slowly weaning the Eurozone off extremely easy money. At the ECB meeting of Thursday the 7th of March Mario Draghi announced the introduction of new TLTRO (the last round ended in December 2018, so this is TLTRO III) and interest rates guidance was modified for the current levels to remain to the end of 2019 (previously mid 2019). Market consensus is for an even longer pause.
This announcement was a particular surprise as the markets expected Draghi to maintain the status quo in order not to tie the hands of his successor in October. However, the ECB clearly feel they cannot ignore the weak Eurozone economic performance until Draghi passes the baton to a new incumbent on 21 October. Indeed, as part of this meeting growth forecast for the Eurozone was cut from 1.7% to 1.1%. While the new policy is market positive the growth forecast cut was taken negatively by markets.
At the same time some commentators have been making comparisons between the EU’s inability to successfully reflate the economy with that of Japan. While there are some similarities, there are also many differences, but the central point is one that we have discussed in our asset allocation meetings for a number of years now.
Clearly, unlike say the US, Europe is struggling to generate ‘normal’ levels of internal growth despite super easy monetary policy. Why is this, well we believe that the ECB has already told us the answer. Look at the quote from Jean-Claude Trichet’s, last speech on the 6th October 2011 (Bold is ECB emphasis):
“Fiscal consolidation and structural reforms must go hand in hand to strengthen confidence, growth prospects and job creation. The Governing Council therefor urges all euro area governments to decisively and swiftly implement substantial and comprehensive structural reforms.”
European structural reform was mentioned by Trichet as far back as 2007 though the emphasis then was more optimistic.
On taking over the Presidency Draghi’s first Speech on 3rd November 2011, he said:
“It is crucial that fiscal consolidation and structural reforms go hand in hand to strengthen confidence, growth prospects and job creation. The Governing Council therefor calls upon all Euro area Governments to accelerate, urgently, the implementation of substantial and comprehensive structural reforms.”
Every meeting Draghi hosted said the same thing for years, I remember the investment team watching on the screens and just rolling their eyes as the same plea was made. So, what about his latest speech given on 7th March 2019 when he announced the easing described above:
“In order to reap the benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural employment and boost euro area productivity and growth potential.“
Fortunately for credits the easy monetary policy negates much of the slow growth risks that otherwise may result in a more seriously weakened corporate sector. However, the ECB has been calling in vain for ‘structural reforms’ to take the pressure off monetary policy for over a decade! It is entirely possible that a populist backlash at the upcoming Euro elections may be about to set the reform glacier into a complete stall or even reverse.
Sadly, despite his best efforts, Mario Draghi is likely to be passing the reform baton he was handed at the beginning of the decade to his successor.