Daily Management Review

ECB Pressure on Governments to Splash the Cash Speculated after Draghi Speech


09/09/2016




ECB Pressure on Governments to Splash the Cash Speculated after Draghi Speech
Speculation that the European Central Bank is pressuring governments to take up the baton to simulate growth was prompted after a rather muted and lackluster media conference by Mario Draghi, the president of the central bank.
 
In investors were disappointed as Draghi gave very few hints on the possibility of extending the central bank's current quantitative-easing program as the ECB held ints interest rates on Thursday. Referring to a recent announcement made by policymakers at the G-20 summit in China, he hoped euro zone governments might finally step up and unleash some fiscal stimulus, he hinted in his speech. Including euro zone members France, Germany and Italy and the European Union as a whole, the G-20 features the 20 biggest economies in the world.

"The ECB can basically flag what is needed for monetary policy to be even more effective that it is a this present time," Draghi said at his regular media conference following the ECB's rate decision.
 
"And I think what I just read on the G-20 is a quite powerful statement of commitment. The G-20 … It's not central bankers, it's governments; it's finance ministers. So they committed in their statement to use all policies, structural policies, fiscal policies, tax policy and to make government expenditure more friendly, which is something that all of you have heard me saying several times," he added.
 
It looks like Draghi might be about to receive his wish- one that he has been urging for years now, that governments to fulfill their side of the bargain on growth. The U.K. is set to unveil a new fiscal plan this fall to combat the effects that the vote to leave the European Union might have on the economy and Japan has already announced a major spending plan.
 
This comes at a time of acceptance that central bankers have done all they can since the global financial crash of 2008 and increasing skepticism towards monetary policy. The composition of any spending program by government was "as important, if not more important" that it's size, Draghi explained to his audience on Thursday.
 
"Draghi indicated that countries with fiscal space should use it - and notably, observed that Germany has fiscal space. Given that a number of German politicians have criticized the ECB's monetary policy, that seems a fair riposte," Howard Archer, an economist at IHS Markit, said in a research note following Draghi's conference.
 
By not signaling further easing, there is a clear desire by Draghi to put some indirect pressure on governments to act on fiscal measures and structural reforms, believes Marc Ostwald, a strategist at ADM Investor Services.
 
"The ostensible shift towards 'fiscalism' remains the overarching theme, with monetary policy options in principle exhausted, even if central banks will be loath to admit that," he said in a note.
  
The euro zone looks "halfway down the Japan route", suggested Neil Williams, group chief economist at Hermes Investment Management, who also had similar feelings.

(Source:www.cnbc.com) 






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