analysis

Eurozone’s central bankers shouldn’t be shy of tapering

There are enough upbeat signals appearing on the economy to start doing so now

By Daniel Moss, Bloomberg
12:20 September 13, 2017

The European Central Bank is approaching a great opportunity to signal unambiguously its confidence in the region’s economic revival. It would be a shame to miss it. The ECB’s governing council returns from its summer break knowing that its current programme of quantitative easing expires at year end. Officials have spent months signalling that decisions are coming and that a consensus will have to be hammered out on whether, and how, to withdraw stimulus. Speculation has focused on the September 7 and October 26 meetings.

ECB President Mario Draghi and his colleagues should look past the obvious caveats like low inflation and anaemic wage growth. These aren’t uniquely European challenges; they are present in most of the world’s major economies.

As a result, they probably aren’t going away anytime soon.

That’s an argument against abruptly ending QE. It’s not an excuse to avoid making a meaningful reduction in the bond purchases that underpin low interest rates.

Notwithstanding prices and wages, the euro region’s economy is going from relative strength to strength. Some welcome news while many Europeans were on the beach last month: Gross domestic product grew 0.6 per cent in the second quarter, picking up the pace from January-March and, more significantly, broadening as the revival spread to more countries.

Germany continued to do well, Spain posted its best performance in almost two years, and France’s expansion became its longest since 2011.

This is a very solid economic backdrop for at least some pronounced tapering of QE. The T word has been a bit taboo in Frankfurt. When the bank announced purchases would go from 80 billion euros a month to the current 60 billion, officials were at pains to say it wasn’t a taper.

Hopefully, they have lost some of that aversion. Europe’s relative upswing is to be embraced, not fled from. Is inflation where the ECB wants it to be? No.

The target is close to but below 2 per cent. Right now, the core measure of inflation is 1.2 per cent. Too-low inflation? Yes.

Deflation? No. There’s not an existential crisis here anymore.

There was little if anything in Draghi’s comments at the recent Federal Reserve’s Jackson Hole retreat to suggest he has soured on the idea of scaling back the amount of money being poured into the system. Yes, he did say in response to questions that “a significant degree of monetary accommodation” is still warranted.

That’s barely distinguishable from “a very substantial degree” that has been used at the last couple of ECB monthly press conferences. The ECB could scale back bond buying from the current 60 billion euros a month to, say, 30 billion euros, keep it there for a while and hold the benchmark rate at zero for a while longer. That is substantial.

Draghi & Co. are way behind the Federal Reserve, which has raised rates twice this year and looks poised to start reducing its own balance sheet. That’s OK.

Europe was slower to start recovering. But the recovery is here now.

European officials shouldn’t let their blood pressure climb too much over the euro’s appreciation. It’s by no means clear the appreciation would stop if, in an effort to appease currency markets, they skipped this opportunity to dial back their largesse. The euro climbed August after Draghi didn’t address the currency directly at Jackson Hole. He must be fine with its rise, so the argument went.

In reality, he probably just wanted to stay away from anything definitive until the governing council gathers in Frankfurt. Those decisions are properly made closer to home. In any case, the topic of the conference was devoted to fostering a dynamic global economy. There was no crisis that cried out for a signal.

Why get ahead of the committee? When policymakers meet this week, they will have fresh forecasts on inflation and growth.

It’s the ECB’s job to be cautious. And the last thing Draghi wants to do is the central banking equivalent of standing on an aircraft carrier with a “mission accomplished” banner.

But there is progress. It creates an opportunity. He should take it.