By Tom Fairless
FRANKFURT -- Mario Draghi risks becoming Europe's political
piƱata this year because of highly charged elections in the
eurozone's biggest economies.
Barely a month after announcing a half-trillion-euro extension
of the European Central Bank's quantitative-easing program and
hinting the bank would do little for most of 2017, its president is
back in the spotlight amid an anti-European Union backlash across
the region.
ECB officials extended their bond-purchase program by a
longer-than-expected nine months in December to help counter
potential volatility "relating in particular to shocks emanating
from the political environment," according to minutes of their
latest meeting published on Thursday.
Politicians in Germany, France, Italy and the Netherlands --
which all face general elections this year -- have recently stepped
up attacks on the ECB, complaining it is doing too little, or too
much, to support the bloc's EUR10 trillion economy. In all four
countries, mainstream parties face pressure from euroskeptic
challengers expected to grab a significant share of the vote.
While swaths of southern Europe stagnate economically, growth in
Germany accelerated to a five-year high of 1.9% last year, and the
nation posted a budget surplus for a third straight year, the first
time that has happened in at least four decades, according to data
published Thursday.
The gulf in economic prospects across the region, where
unemployment rates vary from 23% in Greece to 4% in Germany, is
fueling nationalist sentiment and creating a communication
challenge for Mr. Draghi, who will face the media on Jan. 19 after
a regular governing-council meeting.
The ECB chief has pledged to "keep a steady hand" through a
turbulent political year. But pressure will mount on Mr. Draghi to
show his next move.
Investors will soon start demanding information on what the ECB
plans after December, when its bond-purchase program is currently
due to end.
Any indication that the ECB might extend, or even accelerate,
its bond purchases would be red meat to the bank's German critics,
including the populist Alternative for Germany party. But signaling
that the stimulus could end risks roiling bond markets and driving
up interest rates on southern European debt, fueling an anti-euro
backlash in weaker economies like Italy.
"If the Federal Reserve hikes rates, that's bullish for the
dollar" because it reflects the prospects of higher U.S. growth,
said George Saravelos, chief foreign-exchange strategist at
Deutsche Bank. "But if the ECB hikes rates, what happens to Italy?
The ECB has no good options left."
When then Federal Reserve Chairman Ben Bernanke indicated in
mid-2013 that the U.S. central bank would likely start tapering its
own QE program, long-term U.S. bond yields jumped and the value of
the dollar rose substantially, an episode known as the taper
tantrum.
Renewed criticism of the ECB comes as the eurozone appears to be
emerging from its yearslong economic torpor. Data published on
Thursday showed industrial production in the eurozone rose by 3.2%
in the year to November, up from 0.8% the previous month.
Unemployment is at a seven-year low and the euro has fallen close
to parity with the dollar, a boon for the region's exporters.
But a surge in eurozone inflation, to a three-year high of 1.1%,
has sparked renewed criticism in Northern Europe, where politicians
have long complained that low interest rates punish savers and let
southern European borrowers off the hook.
Inflation is "guzzling our savings," a Frankfurt newspaper
complained Sunday, picturing inflation as a red-eyed monster
swallowing euro bank notes. Markus Soeder, an ally of Chancellor
Angela Merkel, warned this month that ECB policies, combined with
rising inflation, were "catastrophic" for German savers.
"The German economy certainly doesn't need a demand stimulus
because we are almost at full employment," said Clemens Fuest,
president of the Ifo Institute for Economic Research.
Elsewhere in the eurozone, criticism focuses on the ECB failure
to revive sluggish economies.
French National Front leader Marine Le Pen, who is expected to
make the second round of presidential elections in May, said
recently she wants to yank France from the euro, complaining it is
stifling growth.
Italy's economy minister Pier Carlo Padoan took the unusual step
last month of criticizing the ECB's assessment of the world's
oldest bank, Banca Monte dei Paschi di Siena, which has been
ordered to raise almost EUR9 billion (around $9.6 billion) of fresh
capital. Beppe Grillo's populist 5 Star Movement, which is polling
close to 30%, has called for an Italian exit from the currency
union, and said his nation is at war with the ECB.
"The Germans block everything...because of them, and only them,
the periphery is kept caged in the euro," Mr. Grillo wrote in a
recent blog post.
In a move seen as a nod to German concerns, the ECB said in
December it would scale down its bond purchases to EUR60 billion a
month from EUR80 billion after March. Several ECB officials opposed
extending the program at all, according to the minutes. They
include Jens Weidmann, president of Germany's Bundesbank and a
vocal critic of QE.
But that move doesn't seem to have been enough. German bankers,
economists and politicians have been lining up this year to demand
an ECB course change. Mr. Fuest argues that the ECB should start
winding down its bond purchases as soon as April if eurozone
inflation hits 1.5%. The ECB aims to keep inflation just below
2%.
"Everybody in Germany is waiting for a signal of whether they
are talking about an exit or not," said Marcel Fratzscher,
president of German economic institute DIW Berlin.
Economists say the ECB is probably increasingly eager to wind
down QE. The pool of available bonds is dwindling while concerns
about negative side effects mount. One key option for expanding the
pool of assets -- buying more than 33% of each bond issue -- could
create legal and reputational risks, according to the minutes of
the December meeting. Mr. Draghi has repeatedly urged governments
to more actively support growth.
For now, any discussion of tapering looks premature. Mr. Draghi
says the topic hasn't even been discussed by the ECB's governing
council.
"It's still too early for the ECB to adjust its rhetoric," said
Thushka Maharaj, a strategist at J.P. Morgan Asset Management in
London. She pointed to stubbornly low core inflation, which
excludes volatile energy and food prices. ECB officials expressed
similar concerns at their December meeting.
Still, by March, investors are likely to start demanding more
information about tapering, Ms. Maharaj said.
Some economists see a window of opportunity over the summer --
after elections in France but before those in Germany.
"Once they start talking about slowing purchases, markets will
react violently," said Stefan Gerlach, a former deputy governor of
Ireland's central bank who is now chief economist at BSI Bank in
Zurich. "But the ECB has started to move the chess pieces. The mood
music at news conferences will start changing."
--Nina Adam contributed to this article.
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
January 12, 2017 13:10 ET (18:10 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.