ECB meeting: How will Draghi respond to Trump's allegations?

A n hard critic is used to Mario Draghi. The president of the European Central Bank (ECB) has been under constant criticism at least since his arbitrary "Whatever it takes" speech in 2012. But now, even the most powerful man in the world may be He is unleashed against him. Although US President Donald Trump did not explicitly mention Draghi by name,

But the tweet that Trump separated from Europe a few days ago was not unclear. "China, the EU and others have reduced their currencies and their interest rates, while the dollar is getting stronger day by day because of rising US interest rates This costs us our great competitive advantage, "complained Trump.

The President of the United States got help from the International Monetary Fund (IMF), an authority Trump is generally wary of. In its most recent report, the IMF made it clear that the euro was clearly undervalued and that Germany, in particular, benefited excessively. At the same time, IMF economists view the dollar as the third most overvalued currency.

Trump's tirade on the manipulation of unjust money has gained weight surprisingly. The subject should figure prominently at the next meeting of the ECB. Especially since this month, little new monetary policy is expected.

There is no significant evidence that the economy is significantly different from the previous six-week interest rate meeting. At best, the recent intensification of the trade war could further cloud the economic outlook. The Ifo index fell for the seventh time in eight months in July.

The companies surveyed recently noted the economic outlook for the coming months, including: a clear signal that uncertainty about the continuation of the trade dispute is becoming more and more an obstacle for the German economy , strong for exports. At best, it might be interesting to see how the ECB really badesses the impact of trade disputes.

More exciting is a possible retort on manipulation claims. Critics like Trump can certainly define a few points. Above all, there is the ongoing crisis policy of the ECB. Although Europe has long been economically abandoned, bonds worth 30 billion euros are still bought every month.

From the month of October only the sum would be reduced by 15 billion euros completely eliminated by the end of the year. Until now, Draghi has also been able to claim that cheap money is meant to boost lending in Europe. But this argument draws less and less. According to current ECB data, lending to businesses in the euro area increased by more than 4% in June. This is the strongest growth since 2009.

The ECB's balance sheet has expanded considerably

And inflation, which was one of the biggest arguments these recent years to maintain extremely flexible monetary policy, has now recovered. By two percent, prices rose in the euro area. Only the underlying inflation rate, which excludes volatile prices for energy and food products, remains low. But that alone no longer suffices as an argument for a permanently low monetary policy.

The size of the ECB's commitment over the years can be better understood from the balance sheet total. That rose this week with 4.6 billion euros to a new record. This sum now accounts for more than 40% of economic output in the euro area.

On the other hand, America has not only begun to accelerate the normalization process of monetary policy. The balance sheet total will also be reduced successively. The US Federal Reserve achieves this by not reinvesting some of the maturing bonds in old bond purchases and thereby withdrawing money from the market. In this way, the central bank balance of the Fed rose from 4.5 to less than $ 4.3 trillion, or 3.2 billion euros converted into euros. This value represents only 21.5% of the economic output of the United States.

The activity also affects the bond markets. The transatlantic yield differential has reached new historic highs. Between the ten-year US government bonds and the ten-year government bonds, the difference is only 2.6 percentage points. The value has not been as high since the 1980s. In historical terms, the gap was between zero and one percentage point.

Americans Pay More for Public Debt

It was only in the 1980s that Volker Dr Volcker's anti-inflationary policy led to higher spreads. Before that, the yield gap was even negative. In other words: Germany had to pay higher interest rates on German government bonds at ten years than Americans for their US Treasuries. Meanwhile, the difference has reversed and even reached new records for short-term bonds.

And there is strong evidence that this gap will become even larger. After all, the Fed has already announced that it has plans to raise interest rates this year. According to Fed forecasts, rates will rise to more than three percent. On the other hand, the European monetary authorities have made it clear that they will not be affected by record high interest rates in the euro area before next summer.

The huge difference in interest rates forces financial market investors to move their positions to the United States. Money follows the higher yield – and this causes the dollar to rise against the euro. That's exactly what Trump wants to prevent, because a dollar that's too strong counteracts his trade policy.

Every penny that the dollar goes up cancels all US import tariffs. Germany in particular benefits from the lowest rated currency. According to the IMF, the German euro is undervalued by about a third against the US dollar. According to this interpretation, Trump should levy a 33 percent duty on German imports into the United States to ensure the equality of arms in a trade war.

However, Donald Trump does not understand, but the ECB keeps pointing out that all 19 members of the euro area, according to monetary policy is made for all. Manipulations in favor of a country exclude it from the outset.