Where is the Euro Going – Steady after Bale Out!

Outgoing European Central Bank (ECB) President Jean-Claude Trichet (L) hands over a bell to his successor Mario Draghi at the end of a farewell ceremony in Frankfurt/M.,Western Germany.

All eyes will be on Italy’s Draghi next week as he takes the helm of the ECB just days after European leaders hammered out a deal to solve the Eurozone debt crisis.

Mario Draghi to look after the Euro, and the European Central Bank

 

Mario Draghi now at the helm

All the world’s business leaders, economists and politicians eyes will be on Italy’s Mario Draghi next week as he assumes control of the European Central Bank just days after European leaders hammered out a deal to solve the Eurozone’s debt crisis.

The 64-year-old former Goldman Sachs banker officially takes over from Jean-Claude Trichet as head of the guardian of the Euro on Tuesday and then chairs the ECB’s regular monthly policy-setting meeting on Thursday.

The Italian could not be taking over at a more testing time for the single currency and its 17 member states as the world looks to see ifEuropecan really implement the landmark accord to tame a two-year-long debt crisis.

Analysts say the eurozone is not out of the woods and whileGreecemay have gained some breathing space through the deal, Draghi’s home country ofItalyis fully in the spotlight as it grapples with its massive debt.

Furthermore, with economic growth slowing noticeably across the globe, the spectre of recession has not been completely banished.

“Good luck, Mr Draghi — you will need it,” wrote the British daily The Telegraph in its edition on Friday.

Analysts agree that the legacy of Trichet, who for the past few years has been trying to steer the euro and the ECB through the toughest crisis in their short existence, is still unclear.

In May 2010, the Frenchman took perhaps one of the most controversial steps of his career when he decided the ECB should buy the bonds of eurozone countries that were having difficulty in getting financing the usual way via the markets.

Trichet, who was nicknamed the “Ayatollah of the strong franc” during his time as governor of the Bank of France, justified the move by insisting it was only a temporary measure.

But his critics argued it took the ECB beyond its core mandate, which is to keep a lid on inflation in the 17-nation eurozone.

Two of the ECB’s most experienced German policymakers — Bundesbank President Axel Weber and chief economist Juergen Stark — resigned in protest.

“The jury is necessarily still out on whether Jean-Claude Trichet will be the man who saved the Euro,” wrote Guntram Wolff, deputy director of the Brussels-based think-tank Bruegel, in a recent report.

Nevertheless, while the ECB was first seen as an institution that only set interest rates, under Trichet’s leadership it has taken on much more “far-reaching competencies and broad executive authority” and now played a “leading role in assuring financial stability in the euro area,” Wolff wrote.

For incoming Draghi, there are a number of key challenges, he added.

Amid calls for a cut in interest rates to combat the economic slowdown, the ECB has to also show that it is keeping a close watch on inflation.

The ECB would also have to reconsider the role it should play in the sovereign debt crisis, particularly after the latest developments.

At the same time, it should continue to work for a true euro-area fiscal authority, and last but not least, seek to regain the trust of EU citizens which has deteriorated sharply in recent months, Wolff argued.

Turning to possible interest rate moves, ECB watchers believe it will be too early for Draghi to announce a cut just two days after taking office, even if such a move might be warranted on the economic side.

Berenberg Bank economist Christian Schulz said a rate cut could have “a positive growth impact without shifting inflation risks to the upside” but Draghi would likely wait until December when the ECB’s next economic estimates are published.

Jennifer McKeown, senior European economist at Capital Economics, similarly felt the latest economic data “point strongly to the need for more policy support (but) there have been few hints that the ECB is intending to cut interest rates at its November meeting.”

Nevertheless, Draghi “is likely both to signal a rate cut in December and pledge to maintain the ECB’s unconventional support in the form of both unlimited lending to banks and further … bond purchases,” she said.

Commerzbank economist Michael Schubert believed the ECB “will probably have to considerably trim back its growth and inflation outlook before it is ready to slash rates.”

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