The hawks may be fighting back. A growing number from the ECB’s own 25-member rate-setting committee have voiced their concerns. Rushing headlong back into QE and cutting interest rates again is meeting some resistance.
Mr Draghi may carry the vote, because some sceptics, including the Bank of France’s Mr. Villeroy de Galhau, do not have voting rights this month. Nevertheless, the vote could be close, and for good reasons. Indeed, the current debate is tinged with an element of irony: it is Germany that ‘needs’ the stimulus – so it would appear – not France, where job creation has been strong this year.
Whatever the ECB decides tomorrow, monetary policy cannot be the ‘only game in town’. The policy debate will need to widen. France is exerting considerable pressure on Germany to increase public sector investment. If the hawks win the argument on monetary policy, they will need to concede ground elsewhere, starting with fiscal policy. The arrival of Ms Lagarde at the ECB helm could mark a sea change.
For this reason, any disappointment, should the ECB fail to live up to market expectations tomorrow, could prove short-lived. Indeed, so long as France continues to create jobs at a healthy clip – the Q2 Eurostat data were strong – the focus will be squarely on German fiscal policy.
Markets will need to get used to the idea that monetary policy is not going to be the perpetual prop for risk appetite. To be quite clear: there may still be a place for QE, but it will have a supporting role, where yields are kept low to allow Governments to finance a necessary increase in public investment. This policy mix may ultimately have to extend to government-led decarbonisation, to ensure there is any realistic hope of meeting targets set by the Paris Climate Change Accord.
