Mario Draghi, the ECB’s Italian president, is widely expected to leave his benchmark rate at 1 per cent on Thursday.Reuters
It's starting to look like Germany could give the European Central Bank cover to, well, act less German.
Mario Draghi, the ECB's Italian president, is widely expected to leave his benchmark rate at 1 per cent on Thursday. But now that Germany, the economic engine of the euro zone, is very possibly on the cusp of its first recession since 2009, it's all but certain Mr. Draghi will signal his intention to cut borrowing costs next month and he might even hint at further cuts to follow.
This is significant not just because the ECB's main interest rate has never been lower than 1 per cent -- even in the thick of the 2008-09 global financial crisis -- but also because Mr. Draghi has already cut borrowing costs twice, in little more than two months on the job.
Those moves reversed two rate hikes by Mr. Draghi's immediate predecessor, Jean-Claude Trichet, in the spring and summer when he judged that commodity-fuelled inflation might cause Germany's economy to overheat and drive prices up throughout the region. With the benefit of hindsight, it's clear those moves exacerbated the debt problems of the euro zone's most troubled governments, making it harder to keep the crisis from escalating to where it is today.
In fairness to Mr. Trichet, to a large extent he was hidebound by the ECB's strict, German-influenced remit to keep inflation a bit below 2 per cent at all costs. (At the time, inflation was well above that level and it was debatable when it would ease.)
Under Mr. Draghi, though, the ECB is quietly bucking its German influence and behaving more like the U.S. Federal Reserve, where -- as my colleague Kevin Carmichael has noted -- many say Ben Bernanke has pushed the boundaries of the Fed's traditional approach to policy, for better or worse.
Like the ECB, the Fed has a mandate to safeguard "price stability." However, Mr. Bernanke and his officials are also charged with pursuing a second -- and more urgent -- goal of helping the economy produce jobs. Critics (both inside and outside of the Fed) argue Mr. Bernanke's extraordinarily low interest rates risk stoking inflation as the economy recovers, and say the Fed's moves to create hundreds of billions of dollars to buy financial assets such as government bonds and mortgage-backed securities are just this side of against the law.
Mr. Bernanke and his advocates counter that desperate times call for desperate measures, and say the Fed's employment mandate affords them the flexibility to push boundaries and be creative, whether inflation hawks like it or not. Indeed, even as the U.S. shows steady signs of improvement, the housing market is clearly still depressed, which is why analysts believe Mr. Bernanke will add to the Fed's $1.25-trillion (U.S.) in purchases of mortgage bonds since 2009, by as much as $750-billion.
The letter of the ECB's founding treaty, meanwhile, affords no explicit flexibility.
This was no accident, given the intense aversion to any hint of uncontrollable inflation that's embedded in the DNA of most German policy makers, who played a leading role in establishing the Frankfurt-based institution.
Under both Mr. Trichet and Mr. Draghi, the ECB has taken several steps to help euro-zone banks weather the crisis without choking off the flow of credit to consumers and businesses and accelerating the region's downward slide. But even Mr. Draghi, who in December made clear that he overcame internal opposition to his interest-rate cuts, has pointed to the ECB's rigid mandate while resisting appeals to take a so-called bazooka approach and do things like printing money to buy unlimited amounts of stressed countries' sovereign debt.
Still, Mr. Draghi may be closer to invoking a 'desperate-times' argument, as his somewhat reserved strategy gets riskier. European banks are hoarding the €489-billion the ECB has recently pumped into the region's financial system, according to a Bloomberg News analysis of ECB data, meaning the prospect of a credit crunch is alive and well as the region hurtles toward a long recession. Slower inflation is giving Mr. Draghi more scope for as many interest-rate cuts as he needs to make. And after Germany's economy shrank in the fourth quarter of 2011, the belief among Europe-watchers is that a contraction in the current three-month period could push the ECB to consider asset purchases, à la the Fed.
On Wednesday, Fitch ratings agency urged the ECB to do whatever it takes to stop the debt crisis from killing the euro. The next big twist of this endlessly strange endless saga could well be ECB policy makers eschewing German preferences and implicitly declaring, 'We are all Americans now.'