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Hermes Chief Economist responds to today’s ECB press conference

Home / Press Centre / Hermes Chief Economist responds to today’s ECB press conference

Neil Williams, Senior Economic Adviser
08 September 2016
Macro Economics

Some today will be disappointed that Mr Draghi is keeping dry what limited monetary powder he still has - but the nuance here is his gradual warming toward fiscal support.

“A lesson from Japan is that QE provides cash to lend, but cannot force consumers/firms to borrow. The euro-zone looks halfway down the Japan route. It too may be running QE/negative rates, but has yet to loosen the fiscal reins.

“Yet, austerity has pulled down its budget deficit from 6¼% of GDP in 2009 to 2% - below the 3% Maastricht test for EMU. We suspect this makes it easier presentationally for fiscally-prudent Germany and the ECB to ‘turn a blind eye’ to profligacy by the higher-debt members needing to maximise growth. With Greece losing a fifth of its real GDP since austerity and Spain/Italy running 45%/38% male-youth unemployment rates, reform fatigue - and populist parties - are building.

“‘Helicopter money’ is considered a next step, via targeted fiscal give-aways. This would go some way to aligning the euro-zone and Japan with the faster-growing US and UK, whose net fiscal positions have loosened the most in the long run. Together with on-going monetary stimuli, this would raise the chance of keeping the euro down to avoid deflation. A hitch is the absence of a region-wide fiscal agency. This precludes a unified giveaway akin to the US’s tax-rebate cheques ‘helicopter dropped’ to consumers in 2001 and 2008.

“But, this could still be done nationally, perhaps in a coordinated way, supported (by actions if not words) by the ECB’s bond buying. Given the ECB’s concern expressed in the spring about “political risk” (reform-reluctant populist parties) potentially contributing “to contagion and re-fragmentation” of the zone, it should at this lower deficit ratio, be seen as the lesser of ‘two evils’. Reform pledges could even become back-end loaded to allow growth to breathe and avoid credit downgrades.

“Either way, despite an improving periphery, it will take years before the converging countries can reclaim their GDP lost - with Italy and Greece’s real GDP, on a net basis, still yet to rise with the euro.”

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Neil Williams Senior Economic Adviser Neil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea.
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