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Carsten Brzeski’s blog

ECB Preview/Light on action but heavy on words?

After months of excitement and two new attempts by the ECB to revive the Eurozone economy, this week’s ECB meeting should finally be light on new action. At the current juncture, any new measures would be more surprising than Albania winning this year’s European soccer championship. However, given the recent war of words from Germany against the ECB, the press conference should be anything but boring. Expect an ECB meeting that is light on action but heavy on words.

Glimmer of hope in general slowdown
Macro data since the March meeting has been mixed. While soft data continued to weaken, hard data showed some resistance; at least in February, with better-than-expected industrial production and retail sales data. At the same time, however, sentiment indicators dropped across the board and political developments like Brexit fears and a rather general emergence of populist parties have dented hopes of a quick growth revival in the Eurozone. In sum, the picture of the Eurozone economy has not fundamentally changed since the March meeting. It is a picture of weak, albeit above-zero, growth surrounded by high downside risks; not only stemming from the outside but increasingly also from the inside.

Inflation is nowhere around
With the failed talks in Doha, any quick increase in oil prices has become less likely. To the contrary, oil prices might even drop again, at least temporarily, taking away upside pressure on Eurozone inflation. Moreover, the stronger euro will also keep any acceleration of inflation at bay, providing the ECB with ample room to justify its loose monetary policy stance. Particularly the reaction of the euro exchange rate after the March meeting can hardly have been appreciated by the ECB. It seems as if the transmission channel ‘exchange rate’ can no longer be affected by the ECB, but only by the Fed. Consequently, we expect the ECB to send a dovish signal, stressing downside risks to the economic outlook and reconfirming the ECB’s willingness to do more if needed.

Germany’s war of words with the ECB
In the absence of any new policy measures, attention at the press conference is very likely to be mainly focused on the recent war of words, with many German observers – so-called ‘experts’ and politicians – having started a new round of verbal attacks on the ECB and its current monetary policy stance. In this regard, the comments by German finance minister Schäuble were remarkable, when he held the ECB partly responsible for the rise of the populist AfD party in Germany. While apparently Schäuble and Draghi cleared the air on the sidelines of last week’s IMF meetings, media interest in this conflict will remain. Indeed, in our view, no matter how much public backtracking there will be, the genie is out of the bottle and Schäuble has ‘legalised’ ECB bashing in Germany. The war of words will not be over. The ECB will continue to be a very welcome scapegoat, as it makes a multi-layer problem (German banking sector and pension system) look single-layered and helps to divert attention from other policy areas, which they should also pay due attention to.

How will the ECB react?
In our view, the ECB will try to keep a very matter-of-fact tone in this debate, but will remain very tough on the content, probably referring to Article 130 of the Treaties, which is very clear on the ECB’s independence. Looking beyond formalities, the German war of words has very little chance of succeeding. Some might even say that these days, harsh German criticism of the ECB is ‘a way of life’ as is tomato sauce with spaghetti in Italy.