Planet earth to Mario Draghi - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise.


In July 2008, on the eve of the Lehman bankruptcy, the European Central Bank decided to hike European interest rates. Today, Mario Draghi’s ECB seems to be readying itself for a similar egregious policy mistake.

In July 2008, on the eve of the Lehman bankruptcy, the European Central Bank (ECB) in its infinite wisdom decided to hike European interest rates. Today, some ten years later, Mario Draghi’s ECB seems to be readying itself for a similar egregious policy mistake.

Judging by Mr. Draghi’s most recent comments that he “sees no reason why European economic growth should wither,” it would seem that the ECB will go ahead with its plans to end its bond-buying program by the end of this year. It will do so despite the very dark storm clouds that now appear to be gathering over the European economy.

European Central Bank (ECB) President Mario Draghi arrives at the 28th Frankfurt European Banking Congress (EBC) at the Old Opera house in Frankfurt, Germany November 16, 2018. REUTERS/Ralph Orlowski

In dismissing reasons for concern about the European economy, Mr. Draghi is evidently not paying attention to the highly disturbing political developments in the United Kingdom. With Theresa May’s government in complete disarray, there is every likelihood that Mrs. May will not manage to get parliamentary approval for her Brexit deal. That could very well lead to an early general election or the UK crashing out of Europe without a Brexit deal by the end of March 2019. One would have thought that this heightened political and economic uncertainty is bound to constitute a significant headwind to both the UK and European economic recoveries.

More surprising yet is Mr. Draghi’s seeming inattention to the collision course on which his native Italy is with its European partners over its rules-busting budget proposal. That collision course has already caused Italian interest rates to spike and has raised questions anew as to whether Italy might not be headed for another major sovereign debt crisis. With no sign of either the Italian government or the European Commission willing to back down in this budget confrontation, one would have thought that any consequent move to recession in Italy, the Eurozone’s third largest economy, would weigh very heavily on Europe’s overall economic growth prospects.

As if that were not enough, it also seems to have escaped Mr. Draghi’s notice that Germany’s economy declined in the third quarter of the year and that German investor confidence is being dampened by the prospect of heightened US trade tensions, especially in the automobile sector. It is also not helping that Germany is now all too likely entering into a prolonged period of political uncertainty with the rapid waning of Angela Merkel’s star.

A basic problem with ECB policy setting to date has been that it has all too often been based on looking in the rearview mirror. With major political and economic problems seeming to lie ahead, one has to hope that the ECB soon takes a more forward-looking approach to monetary policy setting. If not, we should brace ourselves for a bumpy ride in the European economy.

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