Brexit fears: Draghi to plead for more government spending

European Central Bank president Mario Draghi is likely to plead for governments to do more to boost the euro zone's economy in the coming week as the fallout of Britain's vote to leave the EU and weaker global growth threaten the bloc's recovery.

Governments in China, Japan and Britain have already started easing their fiscal stance or hinted at plans to do so as sub-par global growth and inflation show that central banks’ ultra-easy monetary policy has run up against its limit.

The ECB is not expected to change its monetary stance on Thursday, its last meeting before an eight-week summer break.

But a reiteration of Mr Draghi’s long-standing call on governments to spend more where possible and speed up growth-boosting reforms is once again likely to fall on deaf ears.

Firepower

The only country with significant fiscal firepower, Germany, is reluctant to give up its budget surplus and has resisted any attempt to pool more money at the European level in the absence of greater power-sharing.

“We fear, therefore, that Mr Draghi’s calls for a loosening of the purse strings will go unheard, at least for now,” economists at BNP Paribas said.

“As things stand, then, the burden of responding to the Brexit shock will remain with the ECB, which is all too aware that it has fewer and fewer tools with which to respond,” they said.

The recent slide in many governments’ borrowing costs on the bond market has been seen by some economists as providing more room for public investment. So far, however, there is little to suggest that Europe’s fiscal stance is about to get looser.

In fact, European Union finance ministers agreed this week to sanction Spain and Portugal, two countries battling to emerge from a deep financial and economic crisis, for not doing enough to correct their excessive budget deficits last year.

Tricky questions

Thursday’s ECB meeting is likely to bring tricky questions for Mr Draghi about the effectiveness and sustainability of the ECB’s monetary policy and the state of Italian banks, struggling under the burden of bad debt.

Inflation expectations and German bond yields have slid since the British referendum on June 23rd.

This has fuelled speculation that the ECB may have to extend its money-printing programme and will eventually run out of bonds to buy.

Stabilisation

The ECB is unlikely to take further action before seeing updated inflation forecasts at its September 8th meeting, taking comfort from a stabilisation in financial markets after an initial Brexit shock.

However, economists expect it to announce as early as the autumn that its €80-billion asset purchase programme will continue beyond its current end-date in March next year.

– (Reuters)