In his latest verbal commentary, European Central Bank President Mario Draghi underlined that investments in the region remain low because of weak demand growth, a continued rise in the level of private debt, and the private sector’s fragile confidence. In some countries, the large amount of nonperforming loans building on bank balance sheets continues to obstruct a stronger outlook for credit expansion. These impaired loans give credence to the idea that facilitating a solution for nonperforming loans must be part of a package of measures designed to spur recovery in productive investment. The Euro Area should also implement additional measures to counter the high level of debt and fragile confidence. Additional monetary stimulus is ready according to Draghi, who expressed a willingness to act if the Euro Area’s brittle economy does not show any recovery. However, Draghi remains long on talk and short on action, adding to the recent gains in the Euro.
The current extent of asset purchases combined with further oil price declines and renewed weakening of market-based inflation expectations suggests that the ECB can and will do more, if needed, to meet its price stability mandate. While President Draghi noted that the Central Bank expects inflation to trend back towards the target without delay, the current 0.10% consumer price inflation reported recently is well below the ECB’s desired target of just under 2.00%, trending below 1.00% for nearly two years. Monetary policy cannot by itself guarantee the long-term success of the region according to Draghi, placing the responsibility on sovereign states to press ahead with structural reforms and reduce excessive bureaucracies in order to help accelerate the recovery. In order to build a sustainable recovery in regional fundamentals, potential growth needs to be instilled by governments engaging in fiscal stimulus that adds to the appeal of increasing investment instead of the fiscal austerity environment that suggests additional cost cutting and layoffs.
Draghi Preaches Investment
Market Trends - 15/12/2015