Cantillon: Mario Draghi defends his euro revival package

Mario Draghi came out fighting on Friday, defending his new stimulus package but making it clear that the European Central Bank will go further if necessary.

A day after he sent stock markets down and the euro higher with a plan that fell short of investor expectation, Draghi told a gathering in New York that the expansion of his quantitative easing programme will funnel an additional €680 billion in liquidity into the financial system by 2019.

The ECB is already deploying €1.16 trillion via the original plan, which continues, and principal payments will now be reinvested in more bond purchases.

This was predictable enough stuff from Draghi, who may feel that insistent naysayers in the markets have missed the true import of his pledge on Thursday to keep intervening in bond markets until March 2017 “or beyond”. As promises go in Frankfurt, that’s as open-ended as it gets. Yet the ECB chief took the opportunity in New York to reinforce the implicit message. “There cannot be any limit to how far we are willing to deploy our instruments, within our mandate.”

Draghi marshals the ECB with considerable dexterity, but it’s a divided house still. Jens Weidmann, chief of Germany’s Bundesbank, was quick to let it be known that he voted against expanding the current scheme because he blames low oil for low inflation. His Latvian counterpart Ilmars Rimsevics said a bigger stimulus was not justified as nothing “catastrophic” had happened since the last big ECB meeting in October.

The upshot of it all is that the campaign to revive the euro zone remains a work in progress. The ECB expresses some confidence that growth and inflation are reviving, but admits that there is still a way to go. If it is right, then long-term bond yields could finally start to move off their historic – and extraordinary – lows.

There is more. Draghi takes note of numerous “geopolitical risks” which have potential to worsen conditions. He did not know whether the Paris attacks would have an economic impact but said public expenditure in some parts of the euro zone was likely to rise to fund measures for refugees. Border controls, defence and migration are top of the European political agenda. Pleas for fiscal clemency will surely follow.