Mario Draghi’s soothing words

The European Central Bank (ECB) is getting ready to reduce interest rates, which are already at a historic low of 0.50 percent, and is also preparing for several more quarters of bad economic news. ECB president Mario Draghi’s press conference following the meeting of the bank’s governing council on Thursday could not have been any more revealing: “The European Central Bank expects interest rates to remain at current or even lower levels for an extended period.” The markets made their own interpretation of that sentence, recouped the previous day’s losses and still gained some ground, and ultimately assumed that the ECB will not be ending its monetary stimulus in the present situation.

It is ironic that, this time at least, it was the ECB, that bulwark of orthodoxy, that had to calm investors’ collective nerves after hearing Fed chairman Ben Bernanke say that monetary facilities will ease up as the economy improves. It is obvious that Bernanke’s words did not justify such convulsions, and that the markets overreacted. The same excesses were on display on Wednesday, although this time the jarred nerves could be blamed on the trouble brewing in Portugal and Egypt.

Draghi’s address provided another satisfactory insight. The ECB has toned down its rhetoric, focusing less on concerns over inflation and more on growth and employment. This tendency will manifest itself in an upcoming rate cut (probably at the next bank meeting), and it may be enough to finally launch the mechanisms for financing SMEs. Since the ECB, out of prudence, does not express ideas that are contrary to Germany’s wishes, it must be assumed that its plans have at least been approved by Berlin.

The ECB has toned down its rhetoric, focusing less on concerns over inflation and more on growth and employment

The message to governments, particularly the Spanish one, which is rubbing its hands in anticipation of being able to proclaim an economic recovery, is that “the road ahead is still a long one.” And this is so in part because European banks have not fully dealt with their solvency problems, which blocks up any flow of credit to SMEs. It is a good idea to wait until September or October, once the fog of tourism seasonality has lifted, to know what the real economic situation is.