E ECB Draghi's 'Whatever It Takes' Is Not Enough

It has been five years since ECB President Draghi defiantly stated that the “ECB is ready to do whatever it takes” to combat the then looming debt crisis in the eurozone. The crisis has long past, but the eurozone remains mired in slow growth; and, serious divisions regarding budget fights weaken leadership in Germany and France and the whole mess called Brexit.

It seems that “whatever it takes” has turned out to be not enough. Last week, the ECB lowered its 2019 forecast for gross domestic product growth in the eurozone by 0.1 percentage point to 1.9% and shaved its 2020 forecast by a similar amount to 1.7%. The announcement by the ECB to cut its economic forecast is the culmination of a whole set of risks now confronting the major European economics. In a rather stark admission, ECB President Mario Draghi stated that “It’s a climate of great uncertainty,” that is holding back better economic performance. He cited trade tensions, vulnerabilities in emerging markets and volatility in financial markets as major contributing factors to adjusting growth lower. What triggered the re-assessment of growth was the unexpected weak performance for the third quarter of 2018. Accordingly, the ECB confirmed it would keep its key interest rate unchanged through to the summer of 2019, at minus 0.4 per cent.

Figure 1 Eurozone GDP and Components

Source: December 2018 Eurosystem staff macroeconomic projections for the euro area

Overall, there are unmistakable signs that the area is facing slower growth and no inflationary pressures.An  ECB staff forecast anticipates that growth will slow from 1.9 per cent in 2018 to 1.7 per cent in 2019 and eventually to 1.5 per cent in 2012. Business fixed investment will drop from 3.5 per cent in 2018 to 2.1 per cent by 2012. Finally, the rate of inflation (HICP) is expected to remain below the 2 per cent target used by the ECB. The ECB explains that decline in growth rates is tied to “labour supply shortages in some countries and somewhat less supportive financial conditions over the projection horizon”.

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