By Francesco Canepa
FRANKFURT (Reuters) – For a man credited with saving the euro, Mario Draghi’s final policy meeting at the helm of the European Central Bank will be far from a lap of honour.
Memories of his whatever-it-takes speech, which effectively ended the euro zone’s debt crisis in 2012, are fading, while euro zone inflation continues to lag far below the ECB’s target and is not expected to reach it for years to come.
What’s more, ECB policymakers have never been so divided on the way forward, and Draghi’s final round of quantitative easing failed to win the backing of a third of the Governing Council in September.
The ECB is not expected to make any new policy announcements on Thursday but Draghi, who will be replaced by Christine Lagarde on Nov. 1, is certain to be asked again about those divisions at his final press conference.
“It will be interesting to get a sense from Mr Draghi how divided the Governing Council remains at this stage and to what extent this will limit, in his view, the ECB’s room for manoeuvre going forward,” Dirk Schumacher, an economist at Natixis, said.
And it’s not just a minority of prominent hawks – including the central bank governors of France, Germany and the Netherlands – who question the wisdom of resuming the ECB’s 2.6 trillion euro bond buying programme.
No less than 95% of respondents in a Reuters poll said the ECB’s stimulus package, which also included a rate cut, would not significantly help in bringing inflation back to the ECB’s target of just under 2%.
Price growth in the euro zone was 0.8% in September, its lowest level in nearly three years.
The issue for the ECB is that some of the major factors holding prices down are outside of its control.
First, wages in the euro zone are kept in check by global competition and automation, meaning any monetary stimulus was taking longer to filter through.
Second, the euro zone relies on exports – and especially on Germany’s manufacturers – for much of its growth, leaving it to bear the brunt of a global trade war initiated by Donald Trump’s U.S. administration.
Survey data is expected to show on Thursday that activity in the German manufacturing sector shrank for the 10th straight month in October after plunging to a decade low in September.
A modest expansion in services was seen keeping the euro zone safe from an outright recession, but the ECB has long been calling for more government investment to help the euro zone generate more growth at home.
Its call was likely to be frustrated again, with draft national budgets for 2020 showing only a modest expansion of 0.3%-0.4% of GDP according to JPMorgan estimates.
“The standard assumption is that the impact on GDP is around half of this,” JPMorgan economist Greg Fuzesi said. “Hence, the amount of easing remains relatively modest for now.”
On the upside, a major cloud over the euro zone might have cleared by the time Mario Draghi starts talking if UK Prime Minister Boris Johnson can lure enough members of parliament into backing his last-minute Brexit deal in a vote on Saturday.
Britain leaving the European Union without a deal has repeatedly been cited by Draghi as one of the main risks to the euro zone’s economic outlook.
“If the deal is rejected, we expect heightened political uncertainty, leading to an extension at least to the end of January, and elections before the end of the year,” Morgan Stanley economists wrote in a note to clients.
“But across all scenarios, with the Johnson government firmly backing a deal, we now see an ultimate no-deal outcome as just a tail risk.”
(Reporting by Francesco Canepa; Editing by Hugh Lawson)