Mario Draghi, President of the European Central Bank (ECB), spoke on Monday to the European Parliament’s Economic and Monetary Affairs Committee. While there are many comments in the prepared notes and introduction, some additional comments should be expected from Draghi. The one takeaway that investors should feel is that additional quantitative easing is expected to arrive in Europe — and perhaps sooner rather than later.
Draghi’s first emphasis was that euro area growth momentum has weakened over the summer months and most recent forecasts have been revised downwards. While Draghi maintains that the expectations for a moderate recovery in 2015 and 2016 remain in place, key issues such as high unemployment, excess capacity and ongoing and necessary balance sheet adjustments are all considered issues likely to dampen the coming recovery.
On the scale of the measures that could be taken by the ECB, Draghi specifically noted lending operations, as well as outright purchases that can deliver the intended support to inflation and the recovery of the euro area economy. He added, “All these measures will have a sizeable impact on our balance sheet, which we expect to move towards its early 2012 dimension.”
We need to remain alert to possible downside risks to our outlook for inflation, in particular against the background of a weakening growth momentum and continued subdued monetary and credit dynamics. We therefore need to closely monitor and continuously assess the appropriateness of our monetary policy stance. If necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate. In this context, we have also tasked relevant ECB staff and Eurosystem committees with the timely preparation of further measures to be implemented, if needed. Such measures could include further changes to the size and composition of the Eurosystem balance sheet, if warranted to achieve price stability over the medium term.
One thing that has remained constant is a call for structural reform. Now we are also hearing more about fragmentation across national borders as well. Draghi said:
Monetary policy alone — however — cannot overcome financial fragmentation in the euro area. Fragmentation across national borders also reflects underlying national imbalances and institutional deficiencies. Overcoming these require determined structural reforms on the side of national governments to improve the business environment and setting incentives to invest, with the aim to boost productivity, create new jobs and raise the growth potential of the economy.
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