Eurozone headwinds to test ECB’s confidence

FRANKFURT (AFP) – With trade tensions, an Italian government bucking at deficit limits and emerging market currency woes threatening the eurozone, observers will look to the European Central Bank (ECB) for reassurance tomorrow, while policymakers strive to project stability.

Since July, when ECB President Mario Draghi proclaimed “confidence” in the outlook for growth and inflation, “the balance of risks has become more unfavourable”, say UBS analysts.

Back then, Draghi judged risks to growth in the 19-nation single currency area “broadly balanced”.

On the downside, he highlighted trade tensions between the United States and its trade partners in China and the European Union.

With President Donald Trump now threatening to hit all imports of Chinese goods into America with tariffs, fears of a global economic slowdown triggered by protectionism have only grown.

The headquarters of the European Central Bank in Frankfurt, western Germany. – AFP

Elsewhere, currency crises that have flared in major emerging economies Turkey and Argentina now risk undermining eurozone export partners like Germany and Spain – although “the threat this turmoil poses to developed economies seems manageable for now”, commented Unicredit economist Marco Valli.

And within the euro area, all eyes are on Italy, where the governing coalition between the anti-immigrant League and anti-establishment Five Star parties will present their budget next month.

European authorities, other capitals and financial markets fear ministers will prioritise honouring pricey electoral promises over shrinking Rome’s tottering debt pile of 132 per cent of annual gross domestic product – more than twice the EU target.

EU officials have reassured financial markets in recent days, but the so-called “yield spread” – which measures the difference in perceived risk between Italian and ultra-safe German government bonds – remains uncomfortably high.

Draghi generally prefers not to comment on individual capitals’ fiscal plans, but regularly calls on highly indebted countries to set aside cash for a rainy day rather than indulging in spending sprees.

ECB watchers will also be keen to get their hands on new forecasts from the central bank staff looking as far ahead as 2020, but no major changes are expected.

“The bias for possible (small) revisions appears to be to the downside,” wrote Unicredit’s Marco Valli.

Nevertheless, “we expect ECB President Mario Draghi to reaffirm his confidence in the sustainability of the eurozone’s economic recovery” and in the central bank hitting its target of inflation just below two per cent, he added.