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Dire messages, mixed motivations

Dire messages, mixed motivations

Wrong people may heed Draghi and Rutte statements

by David Marsh

Mon 30 Nov 2015

When political or financial leaders make headline-seeking public forecasts, they are generally guided by two sets of diametrically opposite motivations. Either they wish to win support for a positive predicted event, in order to head off an alternative outcome they deem catastrophic. Or they think the development they are forecasting is extremely negative and want to prevent it happening.

Displaying an example of the first case, Mario Draghi, the European Central Bank president, who clearly has been thinking carefully about his soundbites, said 10 days ago that the ECB will ‘do what we must’ to lift low inflation – foreshadowing further ECB monetary easing on 3 December to counter deflation.

In the contrary textbook example, Mark Rutte, the Dutch prime minister, warned last week that the European Union could collapse like Ancient Rome if it did not act on immigration. ‘As we all know from the Roman Empire, big empires go down if the borders are not well protected'.

These statements share a common denominator. Both seem likely to depress the euro. However Draghi and Rutte must take care. Different audiences may get the motivations mixed up. Lots of people around Europe do not wish the ECB to step up quantitative easing and lower interest rates into further negative territory. They see Draghi’s statement as a fresh sign that the central bank chief is playing with fire in a way that will eventually damage monetary stability.

Equal and opposite considerations apply to Rutte’s statement. Some politicians and their supporters are far from aghast that the prime minster whose country will chair the European Union from January believes it could break up. They will salute Rutte’s prediction as a sign that this should, and possibly will, take place.

The observers who believe that a constant programme of easy money brings negative consequences, and those who would regard a foundering EU with equanimity, often turn out to be the same people. And they may be growing in number.

Weakening the euro, as a means not only of raising inflation closer to the mandated 2%, but also of stimulating the euro economy, has appeared to be one of the ECB’s overall goals during the past 18 months. Since Draghi made his extraordinary statement on 7 August 2014 that ‘other central banks have been reducing their exposure to the euro’, the European single currency has fallen by 20% against the dollar. It looks set to retreat further as the US Federal Reserve raises rates next month.

The ECB president is following a tactic honed to perfection. Draghi labels as likely a controversial future development that has to be agreed by the entirety of the ECB council. This encourages market expectations that it will happen. The prediction becomes self-fulfilling. If the council doesn’t follow suit, financial markets would fall – and the ECB is blamed for triggering instability.

The tactic is aimed at quelling Bundesbank opposition to fresh easing, regarded by many in Germany as well as other conservative Europeans as unnecessary and dangerous. Judging by the Bundesbank’s quiescence in recent days, Draghi’s plans are working, but they may eventually backfire.

Rulers who lose control of borders can lose empires. So can those who lose control over money. Both Draghi’s and Rutte’s messages will be taken seriously, perhaps for reasons they neither anticipate nor favour. It would be an ironical lesson in the use of rhetoric in public statements if both men ended up not preventing but hastening dire outcomes they wish fervently to avoid.

David Marsh is managing director of OMFIF.

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