Brussels Briefing: The Draghi effect

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Amid the doom and gloom surrounding the eurozone’s continued inability to shake off the funk that set in after the sovereign debt crisis started six years ago, policymakers have recently been able to latch on to a bit of sunshine that Brussels has dubbed “temporary tailwinds”. These “tailwinds” are not the kind of good news normally associated with a strong economic recovery, such as companies expanding or workers’ wages increasing. Instead, they’re called “tailwinds” because they make it easier for those things to start happening – a little wind at the back of those thinking about investing in a new plant or hiring more people.

For the eurozone, these tailwinds take three forms: lower oil prices, which fatten the wallets of consumers and energy-intensive industries; a weak euro, which makes European products cheaper to sell overseas; and “accommodative” monetary policy, which lowers interest rates and makes it cheaper for investors to borrow money and build things.

There’s nothing much EU policymakers can do to affect the price of oil, though lifting Iranian sanctions has contributed to the perception the world is now awash with supplies. But yesterday Mario Draghi, the European Central Bank president, did a whole lot for the other two “tailwinds” with just a few sentences of central-bank-ese. First, he described “heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks” – by which he mostly meant recent market upheaval in China. He also noted that eurozone inflation, which is supposed to be running at about 2 per cent each year, remained “weaker than expected”. Then he unleashed the sentence that got everyone really excited: “It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March.” Which means that his already-accommodative monetary policy is likely to get even more accommodative in just a few weeks.

The prospect of even cheaper money in Europe had an immediate knock-on effect on the euro, which fell precipitously in the hours after Mr Draghi’s statement in an early-afternoon press conference following the ECB governing council’s regular meeting in Frankfurt. How big an effect will the lower euro and even more ECB stimulus have on the eurozone’s bleak economic outlook? So far, it appears to have been pretty limited. Eurozone officials had hoped the tailwinds, which first appeared in earnest early last year, would not only spur growth but fend off any headwinds caused by economic turmoil in China. The European Commission is expected to release its new economic forecasts early next month. But the International Monetary Fund has already sounded a cautionary note. In updated economic forecasts published earlier this week, it predicted eurozone economic growth would stay at a meagre 1.7 per cent this year, just a 0.1 per cent gain on earlier projections. Next year, the IMF thinks things won’t get much better, growing again at 1.7 per cent. Sometimes tailwinds just aren’t enough.

What we’re reading

It’s always a sign that negotiations have reached crunch time when one side wheels out its big guns. Was that the signal Apple was sending yesterday when it unexpectedly showed up in Brussels with Tim Cook? The understated chief executive held an unannounced meeting with Margrethe Vestager, the European Commission competition chief who is building a case the California-based tech giant was given a sweetheart tax deal by Ireland and should pay back billions in underpaid taxes. A spokesman for Ms Vestager wouldn’t comment on what the two talked about, but both Washington and Dublin have been furiously criticising the case of late. No doubt Mr Cook offered his own views, too.

The EU’s relations with the Kremlin have gone through all sorts of weather since the civil war in Ukraine broke out two years ago, entering deep freeze after the shoot-down of a Malaysia Airlines jetliner in July 2014 by Russian-backed separatist forces in eastern Ukraine and then thawing gently after the November 13 terrorist attacks in Paris when Europe weighed an alliance with Russian president Vladimir Putin to hunt down Islamist militants in Syria. Now things could get chilly again after yesterday’s publication of a report by British investigators into the murder of ex-KGB agent-turned-Kremlin critic Alexander Litvinenko, which found his death after ingesting polonium-210 was “probably” approved by Mr Putin personally. Russian media reported that the Russian foreign ministry dismissed the inquiry as “neither transparent nor public”, and criticised Britain for politicising a “purely criminal” matter.

Italian bank shares roared back to life yesterday after a week of unnerving drops thanks, in part, to Mr Draghi. He told reporters he had no expectations the ECB, which now supervises all big eurozone banks, was going to be asking any financial institution to shore up its capital because of unexpectedly large non-performing loans. Il Sole 24 Ore, Italy’s leading business newspaper, has a full rundown of what Mr Draghi said, including his belief that there’s been a “significant amount of confusion” about a recent ECB request for more information on Italian NPLs. It’s “nothing new,” he insisted. It also helped that Italy’s biggest bank, Unicredit, announced a €1.8bn share buy-back, that La Stampa noted was the third such operation in the last year. Matteo Renzi, the Italian prime minister, also weighed in with a little reassurance in an op-ed in the Guardian. Still, not all was rosy. The FT reported that the European Commission is demanding more details on an Italian plan to guarantee troubled assets in the financial system. The plan, whichRome says is urgently needed, needs aBrussels green light before it can be implemented.

It was another day full of European leaders at Davos yesterday. Our team at the World Economic Forum reports that that David Cameron, the British prime minister, used his turn in the spotlight to damp down expectations he’ll get a renegotiated deal on the UK’s relationship with Brussels at next month’s EU summit. Downing Street wants a deal in February to allow an EU membership referendum to be called in June. But Mr Cameron insisted he was in “no hurry” if he isn’t offered the right terms. Behind the scenes, widespread optimism last week about the prospects of a deal has given way to a more pessimistic view in Downing Street and Brussels in recent days, as legal problems and disputes over drafting have hampered progress. The Wall Street Journal has a good mood piece from Davos reporting how there is increasing hand-wringing about the prospect of Brexit among the chattering classes.

In the forum’s keynote panel on Europe, which featured both Greek prime minister Alexis Tsipras and his arch-nemesis, German finance minister Wolfgang Schäuble, it was actually Mark Rutte, the Dutch prime minister, who stole the show, telling the Davos audience the EU had “six to eight weeks” to save Europe’s passport-free travel zone. That line echoes similar comments made in recent days by Donald Tusk, the European Council president, and senior officials in Berlin raising the prospect that border controls that have been popping up in Sweden, Denmark, Germany, Austria, Hungary and Greece may become more permanent unless something drastic is done.

Almost overlooked by all the star power at the Swiss resort were the two figures who may well be candidates for this year’s Nobel Peace prize: Nicos Anastasiades, the president of Cyprusand head of the Greek community on the island, and his Turkish Cypriot counterpart, Mustafa Akinci. In their Davos panel, the two presidents vowed to strike a deal this year to reunite the long-divided island. But the Greek daily Kathimerini reported that they also warned the island would need significant financial support from abroad, particularly to help pay restitution for those who lost land and houses in the 1974 Turkish invasion northern Cyprus. In an interview last week with the FT, Mr Anastasiades noted that money was not the only remaining issue left to be resolved; the withdrawal of Turkish troops, and who will guarantee the island’s security once they leave, is still a point of dispute.

The French press is providing the first account of ex-President Nicolas Sarkozy’s new tell-all memior, with Le Figaro providing full excerpts of the tome, due to be released on Monday. Le Monde’s view: Mr Sarkozy offers apologies for his occasionally abrasive style, but gives no ground on substance.

The race for who will head the International Monetary Fund once Christine Lagarde’s current term ends appears to be over before it even started. British finance minister George Osborne renominated Ms Lagarde, and she was immediately endorsed by Paris and Berlin. The Wall Street Journal reports that even developing world stalwarts China and Mexico sounded their support, and while in Davos, Joe Biden, the US vice-president, sang her praises as well.

Finally, we leave you with a longread for the weekend. In tomorrow’s FT Magazine, Brussels bureau Brexit watcher Alex Barker and UK political editor George Parker chronicle how the British prime minister went from not “banging on about Europe” to declaring a referendum on EU membership: David Cameron’s adventures in Europe

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