Which Draghi will we get today – nice or nasty?

All eyes will be on the European Central Bank today as Mario Draghi tries again to boost the eurozone's flagging economy. He has to surprise the markets, says John Stepek – but how?


Mario Draghi has to deliver something surprising to get what he wants.

It's another big day for Mario Draghi today.

The European Central Bank boss has a lot riding on his shoulders.

He's got to solve the economic problems of an entire continent of disparate human beings, using nothing more than a magic printing press.

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When you put it like that, you rather realise how ridiculous the whole notion is.

But that's the reality we live with

Draghi knows he has to surprise us but how?

And I have to say, I'm bursting with curiosity as to what they'll do.

The eurozone economy is still pretty sclerotic. And irritatingly for Mario Draghi, his main target the euro itself has clawed back ground against both the pound and the dollar.

This will annoy Draghi because the reality is that the only way he can have any impact on the "real" economy is by weakening the single currency.

He can't force the banks to lend, because they're still bust. He can't be as indiscriminate with his money printing as perhaps he'd like to be, because the Germans in particular don't like it and who can blame them?

So that leaves the euro as his key target.

The thing about markets is this: if you want your actions to change prices, then you have to surprise them. You have to beat (or underperform) expectations in some way.

Markets will always price in a given outcome. If you simply stick to the path that markets are already pricing in, then the price won't change.

Mervyn King always understood this, what with his much-cited football metaphors about fooling defenders into thinking you're going one way or another, when in fact you're going in a straight line. But he was never that great at acting on it.

Draghi's different. He understands markets in his bones. He knows he has to deliver something surprising to get what he ultimately wants.

But which surprise will he spring?

Everyone's expecting interest rates in the eurozone to become even more negative. And they're also hoping for a bit more money to be pumped into the system. Capital Economics reckons there'll be a 0.2 percentage point cut in the deposit rateand an extra €20bn a month of asset purchases.

So Draghi could always decide to do nothing. That might seem odd. Expectations would be deflated. Markets would probably fall. The euro would strengthen.

But it would give him more firepower for next time. The more deflated market expectations get, the bigger the chance of pulling "shock and awe" out of the hat next time. Particularly if you need to encourage recalcitrant partners to allow you to act more aggressively.

So that's an option.

I'm not sure he'll take that though. Markets are still wobbly, and I suspect he doesn't want to give more credence to the "central bankers are out of ammo" myth.

So I'm guessing he'd rather over-deliver. But how?

The thing is, if I were a central banker right now, and I'd seen what negative rates have done in Japan, I'm not sure I'd be so keen to carry on down that road. I'm not sure that markets really trust negative rates. They seem to create as much of an incentive to hoard as they do an incentive to spend.

So I reckon if he can get it past the rest of them Draghi would be in favour of doing a lot more money printing, and dialling down the negative-rate talk.

I suspect markets would be much more positive about that too. They "get" quantitative easing. It's just more money to pump up asset prices. That's nice for anyone who owns those assets. And because you're printing more euros, the euro gets weaker too.

So if I was going to take a punt, that's what my expectations would be. But we'll soon find out. Meantime, I'm still holding part of my portfolio in eurozone stock markets.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.