Draghi finds some things are best left unsaid

March 11, 2016

It had all been going to plan until 2:56 pm Frankfurt time. The euro had dipped as ECB President Mario Draghi announced new rate cuts to record lows, promised more bond-buying stimulus and offered to pay banks to borrow cash for lending into the real economy. The big bazooka was firing once again and this time it was hitting the target. Then, in a comment which he perhaps thought would show his confidence that everything was under control, Draghi said he doubted any more rate cuts would be needed. Although many in the market might have come to a similar conclusion themselves, the effect was devastating, sending the euro higher and so effectively wiping out much of the stimulus effect he had achieved only minutes earlier. The response of the market is not wholly logical and is probably best understood in terms of a cheap Hollywood romance: “I knew it had to end sometime, Mario — but I can’t bear to hear you say it.” Whatever. Draghi’s reputation as a verbal enchanter is compromised for a second time, the full impact of this last batch of stimulus has been squandered and the secret is out that central bankers are running out of ammunition. Over to the Fed, Bank of Japan and Bank of England next week.

A panel of the pan-European Council of Europe rights watchdog will later issue an opinion on the Polish government’s controversial reform of the constitutional court, which critics say is part of the creeping authoritarianism of the ruling Law and Justice Party. The panel’s views are non-binding but the European Commission has said it would watch the release closely when it decides whether the reform breaches EU rules — with possible punishment to follow.

Germany’s Angela Merkel is on the campaign trail again today with events in Trier and Halle ahead of closely-watched regional elections on Sunday. Voters in the three states — two in the west, and one in the former east — will give a verdict on her “open door” migrant policy and subsequent efforts to stem the flow via an EU deal with Turkey. Whatever happens, most expect Merkel to survive through to the end of her term. But Europe’s most powerful leader has lost some of her self-assuredness of late and the anti-immigrant Alternative for Germany (AfD) is set for big gains. “Merkel will continue to be chancellor, but maybe with a black eye,” one University of Munich political analyst noted.

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