Mario Draghi is back.
Just a few short months ago, the consensus seemed to be Europe was about to fall into a Japan-style lost decade of inflation, but with higher unemployment and the extra nationalist tension.
Nobody was sure that the European Central Bank (ECB) chief could do anything about it — he was facing crippling opposition within his own board, and from some of the governments in the eurozone.
I admit that I fell into that camp of people — I thought more QE was a good idea but I didn’t think Draghi either had the desire or the support to really do “what it takes.”
At the time, all analysts seemed to talk about was the fact that the ECB couldn’t do very much (if it was done at all) — it would not be “a panacea”, “a silver bullet” or “a magic wand.” Of course, nobody had suggested it would be.
And as recently as December, some people even suggested Draghi was about to flee the horrors of the European Central Bank (ECB) and become President of Italy.
But Draghi has a lot of reasons to be cheerful now. Even the protester who burst into the ECB and showered him in confetti shouldn’t dampen his spirits.
For starters, he won the internal battle over the ECB’s QE programme. It was about twice as large as analysts generally expected. And opposition to the scheme has evaporated, and even German finance minister Wolfgang Schaeuble seems to have begrudgingly conceded that the programme seems to be going well.
Pretty much every indicator is looking up at the moment: Consumption is particularly explosive at the moment, with car sales up by 13% in the last year, led by a 40% boom in Spain.
It’s hard to disentangle the onset of QE from the plunge in oil prices, but inflation expectations have now stopped tumbling.
Oxford Economics analysts even said this week that their model “suggests that inflation will not climb much above zero until the autumn, it points to a steep increasethereafter and an average annual increase of 1.6% in 2016, above the consensus and ECB’s own forecasts.” (Graph right)
But they don’t expect that to end the new QE scheme early.
BNP Paribas added that the latest survey of private forecasters showed an uptick in inflation for 2016 and beyond, and that the result “supports ECB chief Mario Draghi’s assertion that quantitative easing (QE) is having the desired effect on inflation expectations.”
When quizzed by the press on Wednesday, Draghi was relaxed and bullish — he rejected the idea that QE would cause financial bubbles, said there was no real risk that the bonds the ECB is purchasing would become too scarce in the market, and reiterated his aim to continue the purchases until at leas 2016.
His internal opponents seem nowhere to be seen, and there was no sign of any anti-QE influence in his remarks. It felt like he was back in command of the ship.
Credit Suisse’s analysts are even more gushing in their praise of Draghi.
Here’s Credit Suisse:
In our view, ECB monetary policy is far more aggressive than that seen at its peak in either Japan or the US, with the implications for global capital flows substantially underestimated in many circles…
Like Chairman Volcker in the early 1980s, we feel that Dr Draghi is being truly radical, and that this deliberate policy to force investors out of safe assets has substantially further to run.
That’s a pretty bold statement. Paul Volcker was US Federal Reserve chair during the early 1980s, and today he’s credited with a painful but ultimated successful series of interest rate hikes that whipped the United States’ high inflation. Can Draghi do the opposite, and bring inflation back?
The eurozone is still not a pretty picture — the recovery is now five years late, Greece is an albatross around the neck of the whole region and Europe’s structural problems can’t be solved by monetary policy.
But the pictures for both Europe and Draghi are substantially better than they were at the turn of the year.