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07 November 2019

A Daunting Dawning for ECB President

Mario Draghi, President of the European Central Bank, stepped down last week, and his successor Christine Lagarde has a pressing concern as the Eurozone inflation rate dropped to 0.7% in October, taking it below the target of consumer price growth of 2%. Before officially taking up her new position Ms Lagarde called on Germany and the Netherlands to stop the tradition of saving money and use the funds to invest in investments that would support the economy. Ms Lagarde stated “Those that have room for manoeuvre, those that have budget surplus, that’s to say Germany, the Netherlands, why not invest that budget surplus and invest in infrastructure? Why not invest in education? Why not invest in innovation, to allow for a better rebalancing?” She continues her statement supporting the policy of negative interest rates imposed by Mr Draghi saying that “people should be happier to have a job than to have a higher savings rate”.

Bill Keen, investment manager at Redmayne Bentley, commented: 

“Following on from Mario Draghi’s successful eight-year tenure as head of the ECB is surely a pretty daunting prospect for Christine Lagarde. A slowing global economy, trade friction between the USA and China, coupled with the recent imposition of tariffs on a wide range of European goods, provide a very challenging background.

“Quantitative easing involving bond buying by the ECB is due to resume shortly. This is at a targeted level of €20bn per month, and with interest rates recently reduced to -0.5%, further action to boost economic growth is likely to centre on other policy measures. Encouraging individual countries to increase spending on infrastructure projects would have short term benefits and could eventually lead to some productivity gains.

“Christine Lagarde’s support for much needed economic reforms across the Eurozone is also a possibility. Inevitably this requires substantial, measured and delicate political persuasion and clearly represents a long-term aspiration.” 

Away from the noise of the ongoing US-China trade wars and Brexit, the Eurozone economy has defied expectations with a slight incline in growth for the third quarter. Speculation had mounted that a further turn in events, namely Brexit, a general election looming and continuing trade tensions, that the economy would falter, indicating a slowdown. However, the economy expanded 0.2%, giving an annual growth rate of 1.1%.
Staying within the Eurozone, Spain is going to the polls for the country’s general election. Current Prime Minister Pedro Sanchez and his Socialist Party have struggled to raise finance to increase infrastructure spending, despite levying taxes on larger businesses. In their election policy they indicated that they will continue to pursue income tax increases, particularly on higher earners, with the proposal potentially raising €5.5bn. The Socialist Party has already increased the minimum wage by 22% to deal with the vast inequality witnessed in Spain and the continuing recovery from the global financial crisis. It is, however, expected that there will be no governing majority following the election with the People’s Party pressing hard on reform, offering up to €16bn in tax cuts.
 
Figures for the third quarter show that Spain’s economy expanded by 0.4% outpacing both Italy and France. While Spanish unemployment numbers have stopped declining, figures remain at 14% which is still having an adverse effect on the nation, as debt remains at nearly 100% of GDP. A stable government is urgently required in order to push through reforms and see growth numbers return to previous boom years.

All eyes will be on Christine Lagarde to see which ways she steers the European economy at a time when many believe the central bank is running out of firepower.
 
Ends
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A Daunting Dawning for ECB President
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