Global Politics Now Bigger Risk for European Growth

The head of the European Central Bank says global political events like Brexit and turbulent election campaigns in Europe pose increasing risks for the economy.

Mario Draghi said that the international arena has become more troubling since last year even as the 19-country eurozone’s economy continues to heal from its own home-grown and drawn-out economic difficulties, AP reported.

 “If one wants to assess the balance ... we would say that the domestic sources of risks have been more contained,” Draghi said at a news conference after the bank left its stimulus programs unchanged.

“And the geopolitical global risks, share of importance, if anything, have gone up,” he said.

Risk factors, Draghi mentioned, include the raft of European elections this year in France, the Netherlands and Germany that will give right-wing candidates opposed to the EU and euro membership a chance to test their support. And Britain is due to start its official divorce talks with the European Union within weeks.

He portrayed the currency as the key to European prosperity and even took an implicit jab at the protectionist rhetoric of President Trump.

“Open trade has been the pillar of world prosperity for many, many years,” Draghi said.

Although it made no major changes to monetary policy on Thursday, the bank is under increasing pressure to begin withdrawing the stimulus program that has prevailed for a decade. That task, delicate in the best of times, is even more difficult in the charged political atmosphere that permeates not only Europe but also the United States and the rest of the world.

 Geopolitical Events

US President Donald Trump has raised uncertainty about US policy on trade as well as toward the dollar by at one point mentioning the currency was “too strong”. One of his trade advisers accused Germany of benefiting from a too-weak euro. Draghi rejected such criticism, citing the US Treasury’s own assessment that the ECB has not intervened in currency markets.

He said it was especially important for countries to avoid protectionism and stick with commitments not to devalue their currencies to grab a quick trade advantage at others’ expense. Finance ministers from the Group of 20 biggest economies, including new US Treasury Secretary Steven Mnuchin, are to get a chance to do that at a meeting in Baden-Baden, Germany, next week.

Draghi said that while geopolitical events have not derailed the economy’s recovery so far, it was unwise to become complacent.

 “We don’t know yet how these risk events will reverberate on the economic situation,” he said.

 Inflation

Draghi pointed out that the recent rise in the annual inflation rate to 2%—past the ECB’s target of just below 2%—has come from higher oil prices, and not from fundamental improvements in the economy such as higher wages for workers.

He said underlying inflation across the region is still too weak for the bank to start the process of withdrawing its monetary stimulus efforts.

Core inflation, which strips out the volatile items of food, energy, alcohol and tobacco, has been stubbornly low over recent months at an annual rate of 0.9%.

In light of the near-doubling in the headline inflation rate to 2% in the past few months, the ECB, which is the chief monetary authority for the 19 countries that use the euro, sharply raised its inflation projection for this year, to 1.7% from 1.3% previously.

The inflation estimates for 2018 nudged up to 1.6% from 1.5% while the forecast for 2019 was left at 1.7%.

Draghi credited the bank’s stimulus for the improvement in the economy and said that data suggest growth will continue “to firm and broaden”.

It’s not that all the problems have been solved in the Eurozone: In Spain, unemployment among young people remains high—40% are without a job. But there are also clear signs that the economy in the eurozone is recovering.