www.varchev.com

Was this Mario Draghi’s most important message yesterday?

Is the Central Bank of Europe defeated? This will be a key question that markets will have to answer in the coming months as Mario Draghi announces new incentives yesterday.

To balance things, these incentives have many pros and cons to both the bears and the bulls of the euro, but I think the most obvious, and perhaps the most important thing about all of this, was Draghi’s message to the world during the press conference .

“There was unanimity, and it was that fiscal policy should become a major tool. There was overall agreement on this. It is high time that fiscal policy took responsibility.”

Reporters chuckled the way he sent the message while questioning him unanimously between the board about the incentive measures introduced yesterday, but I don’t think he could have been more serious at the time he mentioned the message.

And he not only repeated it once, he hinted at the need for fiscal policy many times when answering questions from reporters, adding that:

“Negative interest policy is a necessary tool and has many positive effects. How can we accelerate these positive effects so that interest rates can rise again? The answer is again, fiscal policy.”

What does all this mean?

In essence, the message that Draghi tried to make was that monetary policy alone cannot solve the problems in the euro area. Fiscal stimulus from governments is also needed to try to combat the economic slowdown / decline.

This is one of the reasons why the ECB leaves room for further relief (only 10 percentage points and a QE of EUR 20 billion per month). At the end of the day, they will feel that there is nothing more they can do about monetary policy.

What next?

It all boils down to how effective these ECB measures can be in slowing down the economic contraction and boosting inflation expectations.

In my opinion, these measures are not sufficient in themselves to curb the oncoming depression in the euro area, but they may perhaps inspire investor confidence and businesses will temporarily help short-term relief.

In the long run, however, markets will need to more accurately assess whether the ECB is, in fact, unable to do more.

If the central bank does all this and it is not enough, the lack of fiscal support will sooner or later sink the euro significantly, as markets will become aware and accustomed to the idea that the eurozone itself cannot cope with the global slowdown .

With that being said, this is a topic I expect to play out in the next 6-18 months, not a reaction to see tomorrow. But of course, the rapid deterioration of the economic situation will only exacerbate the ill-fated scenario.


 Trader Aleksandar Kumanov


Read more:
RECCOMEND WAS THIS POST USEFUL FOR YOU?
If you think, we can improve that section,
please comment. Your oppinion is imortant for us.
WARNING: Any news, opinions, research, data or other information contained within this website is provided as general market commentary and does not constitute investment or trading advice. Varchev Finance Ltd. expressly disclaims any liability for any lost principal or profits which may arise directly or indirectly from the use of or reliance on such information. Varchev Finance Ltd. may provide information, quotes, references and links to or from other sites and blogs and other sources of economic and market information as an educational service to its clients and prospects and does not endorse the opinions or recommendations of the sites, blogs or other sources of information.
Varchev Finance