Will Mario Draghi ever actually do 'what it takes'? If he doesn’t, the euro could spike

Mario Draghi has been hinting at stimulus measures for a while, says Matthew Partridge. Soon, he 'll have to make good on his promises.


Mario Draghi will have to follow up on his promises soon

What's going on?

Draghi did say that the ECB is seriously considering QE, and will not allow inflation to fall below the 2% mark for a prolonged period.

He also said he "intended" rather than just "expected" the ECB's balance sheet to return to 2012 levels in other words, he wants to buy a load more assets.

However, he refused to be drawn on when this would take place, or what assets it would involve, only saying that the situation would be "reassessed in early 2015". As a result of the disappointment, the euro rose slightly, while share prices in the eurozone slid.

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Why does this matter?

Italy didn't grow at all, and France is now in recession. And even though the likes of Greece are now growing again, they still have huge levels of unemployment.

That's all bad enough but many economists also reckon this fragile recovery won't last for long. Business and consumer confidence is low, and the ECB's own forecasts suggest growth will be only 1% next year.

Inflation, meanwhile, is expected to average around 1.3%,which raises the threat of deflation in several countries, if not across the whole eurozone. The hope is that QE, especially if it involves buying government bonds, will boost lending to businesses and growth in general.

Could QE help in any other way?

Recently France and Italy tried to get the European Commission to relax their fiscal targets, in order to boost growth. Both countries backed down eventually, but were able to submit revised budgets based on "optimistic" projections about future growth and revenues.

Greece is also trying to negotiate an exit from the bailout, although it is having problems securing a backup credit line (perhaps unsurprisingly). Lower sovereign bond yields would go a long way to resolving both situations. This would also reduce the risk of another messy confrontation between Brussels and individual countries.

So why on earth hasn't Draghi done QE yet?

Germany's representative on the ECB, Jens Weidmann, the head of the Bundesbank, has also argued that QE would only have a limited impact.

In response, Draghi pointedly said during Thursday's press conference that the ECB could take action even if there were disagreements between members. This suggests that Weidmann is increasingly isolated though he clearly still has enough power to delay matters.

If Draghi doesn't follow up on his promises soon, the euro could go a lot higher again which is exactly what he doesn't want and what the peripheral countries don't need.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri