It’s Mario Draghi’s first week at the helm of the European Central Bank, and he’s already making a splash.
Investors are already cheering the decision, given the worsening economic conditions in the eurozone. They’ve been hoping the move could spur growth across the euro area.
Draghi gave us more insight into the rate cut decision, confirming that downside risks to economic growth were likely to mitigate economic growth ahead. In that vein he told reporters, “the world is heading to a mild recession by year end.”
But he refrained from talking about the likelihood of a rate cut next month. A unanimous decision to cut rates suggests that further accommodative measures will be considered in the future, particularly if the euro area economy continues in a downward spiral.
He also disappointed analysts looking to see the ECB transition to more powerful institution that could mitigate the crisis. He told reporters that the ECB depends upon the EU treaties, and so talking about a game plan if Greece were to cease participation — something that is not in the treaties — is pointless.
On the other hand, his refusal to discuss what the ECB would do in such a situation might also imply that the ECB’s role could change legally if the treaties were to be violated. While this remains a distant dream, it nonetheless presents an interesting opportunity to change the structure of the eurozone.
With “particularly high uncertainty,” however, it remains hard to predict what will happen across the euro area.