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This happens from time to time to the best: Mario Draghi found himself Tuesday at the heart of the last attentions of President Trump.
missile. Mr Trump has accused the head of the European Central Bank of conducting a new currency war and, typically, a tweet from Trump is wrong.
Trump's latest monetary policy explosion came after Draghi promised in a speech that the ECB could continue to stimulate the eurozone economy if it needed it. Confirmation that the ECB is considering a turnaround in the dark days of Draghi's term has brought the value of one euro down 0.5%, less than $ 1.12. European stocks jumped as bond yields fell. Trump said the rapid depreciation of the currency made them "unfairly easier to compete with the United States."
Mr Draghi should understand that Trump's real goal is Federal Reserve Chairman Jay Powell, whose Open Market Committee is meeting this week. He asks Powell to cut US interest rates. The President's complaint is also a little rich, considering that one of the main economic threats to which Mr Draghi reacts is the multifaceted tariff offensive of Mr Trump.
The ECB is also at a standstill in the midst of signals that the Fed could cut rates this week or later this year. All modern central bankers try to manage unconventional monetary policies without a road map or international coordination. I apologize to Mr Draghi for hinting that he wanted to be no more out of step with the Fed than he already was.
But it is also true that the depreciation of the euro is a clear, albeit undeclared, goal of Draghi's policy for years. Starting at around $ 1.40 in 2014, the euro fell to around $ 1.05 at the end of 2015 when Draghi presented his version of Quantitative Easing (QE) and settled around 1.12. dollar recently.
The hope seems to have been that a weakening of the euro could spur some inflation in import prices while giving European exporters a boost that would politically facilitate domestic economic reforms. Neither has arrived. Import prices have never risen enough to produce the ECB's nearly 2% inflation, while any export revival was mainly aimed at economies such as Germany, which needed it the least. Substantive reforms have never materialized, except belatedly and still insufficiently in France.
A working paper published in 2018 by Berkeley professor Andrew Rose examined unconventional monetary policy such as that practiced by the EU and the Fed and showed that it did not increase exports. "Countries using quantitative easing and / or negative nominal interest rates have simply not experienced an export boom," Rose wrote for the National Bureau of Economic Research.
Trump's warning to Mr. Draghi and his successor is nonetheless that Washington will be alert to further attempts at competitive devaluation on not-so-cunning people. This does not matter, because it is not clear that Mr. Draghi's successor will be able to follow Draghi's game book.
Until now, Mr Draghi has been cautious about the additional adaptations that the ECB could offer, in part because the menu is short. It could further reduce the key rates of the ECB, even if the rate of bank reserves is already negative 0.4%, a loss of profit. Loan grants granted through various TLTRO programs (do not ask what they represent) have not delivered the expected results.
Investors call for a resumption of asset purchases, or quantitative easing, of the ECB that ended in December. But this would drag the ECB into a new political minefield, as it was already approaching the limit it had imposed on itself, namely not to own more than 33% of the debt issued by any country. The lifting of this cap will raise new objections from long-time critics of QE, particularly in Germany, and potentially push the ECB into disordered political and legal struggles as a significant minority owner of various debt instruments.
That leaves Mr Draghi now to do what he did on Tuesday: trying to talk about the markets, talk about the euro and go beyond the practical limits facing the ECB. But there are limits to this strategy, Mr. Draghi has always been the first to warn him. National reforms aimed at boosting labor and product markets and boosting business investment have been the missing ingredient in the European economy for decades. Without them, Europe is struggling to achieve sustained growth regardless of the exchange rate.
Mr Trump is right in saying that the euro area has attempted a competitive devaluation instead of hard reforms, but it is wrong to think that it works for Europe. He is also wrong to think that it would work for the United States.
