The ECB did not exactly throw the kitchen sink at the problems faced by the euro area yesterday and Draghi underscored why that is the case
Has the ECB been defeated? That will be the key question that markets have to answer in the coming months after the central bank's stimulus package announcement yesterday.
On the balance of things, the package has a bit for both euro bears and bulls to chew on but I think the more telling - and arguably the most important - thing about all of this was Draghi's message to the world during his press conference:
"There was unanimity, namely that fiscal policy should become the main instrument. There was complete agreement on that. It is high time for fiscal policy to take charge."
Reporters chuckled in the way he sent the message across as they questioned him about unanimity among the governing council on the stimulus measures introduced yesterday, but I reckon he couldn't have been more serious in timing said communication.
And he didn't just repeat it once, he alluded to the need for fiscal policy quite a number of times when answering questions from reporters; adding that:
"Negative rates policy is a necessary tool and has many positive effects. How do we speed up these positive effects so interest rates can go up again? The answer is once again, fiscal policy."
What does this all mean?
Essentially, the message that Draghi is trying to get across is that monetary policy cannot resolve the problems in the euro area on its own. There is a need also for a fiscal boost by governments in order to try and combat the economic slowdown/downturn.
It is one of the reasons why the ECB left some room for further easing (only a 10 bps rate cut and QE of €20 billion/month, despite being open-ended). At the end of the day, they will feel there is only so much that they can do on their part with monetary policy tools.
So, where do we go from here?
It now boils down to how effective these measures by the ECB will be in stalling the economic slowdown and bolstering inflation expectations.
In my view, these measures are not enough to avert a further deterioration in the euro area economy but perhaps it could lend confidence to investors and businesses temporarily and that may help provide some near-term relief.
In the long-term though, markets will have to be more decisive in figuring that out and also to identify whether or not this is just about all that the ECB can do within their capacity to help shore up the economy and inflation.
If the ECB throwing the kitchen sink at the issue still doesn't cut it, the lack of fiscal support will eventually see the euro headed significantly lower as markets start coming to terms with how fractured the European framework is in dealing with the latest global downturn.
That said, this is a theme I would expect to possibly play out over the period of the next 6-18 months rather than a reaction that we could see tomorrow. But of course, rapid deterioration of economic data will only speed up this timeline.
