Sun, Nov 18, 2018 page16

• ECB policymakers keep a brave face

  JUDGING UNCERTAINTIES: Despite trade risks that need careful monitoring, the head of the European Central Bank said that risks to the eurozone’s growth appear balanced

  • Bloomberg
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  The eurozone economy is testing the mettle of European Central Bank (ECB) policymakers, who need to judge whether a multitude of uncertainties are crystalizing into serious risks to growth.

  Officials are putting faith in domestic resilience and say temporary factors that dragged on the third quarter should fade. The broader message is that after a period of youthful exuberance, it is more a case of the expansion hitting middle age than moving into terminal decline.

  However, there is concern, too.

  ECB President Mario Draghi on Friday said that there might be a rise in trade uncertainty, adding that external risks could seep into the euro economy, damage sentiment and put the brakes on investment.

  “We need to monitor these trade risks very carefully over the coming months,” Draghi said. “However, we still see the overall risks to the growth outlook as broadly balanced, in large part because the underlying drivers of domestic demand remain in place.”

  Recent numbers paint a grim picture, with growth slowing and Germany, the eurozone’s biggest economy, shrinking for the first time since 2015. Business confidence has weakened and there are reasons to fear for the outlook given Italy’s protectionist threats and ongoing budget battle. The euro last week fell to a 17-month low.

  The validity of the resilience hypothesis would determine whether the ECB can stick to its path out of stimulus. The next crunch call comes next month, when the bank would have new forecasts and a clearer view of how material the risks are, and whether “balanced” needs to be replaced by “downside.”

  Previous cycles suggest that the expansion might have the legs to power through the headwinds. According to ING Groep NV, it is still relatively young by historic standards.

  For now, policymakers are approaching the economy with a glass half full.

  Bundesbank president Jens Weidmann last week said the recovery remains “intact’’ and ECB Executive Board member Peter Praet said demand is still “robust.’’

  The next step is raising interest rates. That is not expected until late next year, although some economists are already questioning the timing of liftoff and the pace of any subsequent tightening.

  Taken alone, the ECB is also sanguine about the potential for disruption: Brexit, whatever its form, would hurt the UK more than Europe; direct trade tensions with the US have eased; and contagion from Italy has been limited.

  “The biggest risk for the eurozone is if too many of those risks were to materialize at the same point in time,” Dutch central bank governor Klaas Knot said.

  Some businesses are not so sure that everything can be dealt with separately. For companies with a global reach, trade tensions between the US and China have already eaten into profits, reducing their capacity to bolster European operations.

  “We must absolutely be aware of the necessity to find ways to de-escalate,” BMW AG chief financial officer told a Franco-German business forum in Paris last week. “Why? Because it’s less money to invest in the future.”

  Waiting to see where the external environment takes the eurozone is frustrating some at the central bank, who are saying that the ECB cannot do much more and that there needs to be a more-coordinated economic policy.

  “When the US slows down, Europe suffers immediately, but when Europe slows down, it doesn’t cross back the other way,” Bank of France Governor Francois Villeroy de Galhau said last week at a conference in Lyon. “There is a total asymmetry. We need to be able to count more on our own economic strength.”
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