The eurozone and its central financial institution, the European Central Bank, have been facing a series of seemingly non-stop challenges in recent years. Slow growth, economically strained member nations, and the potential of powerhouse Britain’s exit from the EU all pose serious threats, and as the future of European unity seems to be uncertain, the ECB is being watched by the world to see what may happen next.
Growth and Volatility
In a January policy meeting, the ECB’s policy makers widely agreed that the risks for the eurozone have increased amid broader financial market volatility and weakness in emerging markets. Slowing growth in the region has caused the ECB to miss its inflation targets for the past four years, a trend which doesn’t show any sign of stopping soon. Subsequently, while the bank’s public message is one of strength, internal dissonance is alive and well.
Bank President Mario Draghi insists that there is a future for the euro, calling for lower taxes and greater public investment from governments to help stimulate the growth of the €10 trillion economy. Monetary policy, by his review, has been the primary stimulation for the recovery seen over the past two years. Internally, though, rate setters and policy makers are divided over what actions to take, looking particularly at the the March 10 meeting of the ECB Governing Council.
Draghi insists that the bank won’t hesitate to act come March, but internal Council members remain divided with many calling for action including accelerated bond purchases and decreased deposit rates, and others arguing that the block has proved resilient to market turbulence in the past and should be allowed a time of adjustment to see if inflation picks up. Despite all this, the market seems to know that despite Draghi strong stance, the ECB is not as robust as the Bank’s President would have you believe.
The Political Factor
Amid larger market fears, the Bank is attempting to turn eyes towards more easily regulated or more readily publicly addressed political matters. One of the heavy issue on which the Bank has been heavily commenting is the potential departure of the UK from the EU.
While Britain has currently cut a deal that keeps it at least partially integrated in the EU, and while it has not adopted the euro as official currency, a “Brexit” could lead to increased financial tension in Europe as trade and tariff arrangements are muddled amid a move that has been theoretically spelled out on paper, but that has yet to be realized.
The bank is also spreading wide messages about the future of the €500 note, which has been lined largely to terrorism and criminal activity. It’s an easy-enough thing to regulate or change on their part, and it’s a shrewd PR move by the bank, buying them time to figure out a future in a market that has lost faith and a Europe that is less committed to centralization than ever before.