For the next six months Theresa May, the Prime Minister of Great Britain and Donald Trump, as of Friday the President of the United States, and voters in the Netherlands and France will be far more important for European monetary policy than any pronouncement from the European Central Bank.
The ECB left interest rates and its bond purchase program unchanged after Thursday’s governing board meeting, as expected, and President Draghi's press appearance was, to put it mildly, subdued. Gone are the heroic days of doing whatever it takes to save the euro.
The euro may be saved, or not, but it will be the voters in the Netherlands and France and perhaps Italy and Germany, following in the footsteps of the US and UK, who will do so, not Mr. Draghi and the bankers.
If any of these countries elects an anti-EU government there will be little Mr. Draghi and his colleagues will be able to do to beyond advising on the dissolution.
Ms May's Brexit project and Mr. Trump's renegotiation of U.S. trade agreements will determine the tenor and specifics of global trade and have far more impact on Europe’s export economies than any policy combination from Frankfurt.
At the customary post-decision news conference some of the first questions from the attendant journalists were inquiries about Donald Trump and Theresa May's plans for implementing the departure referendum. Mr. Draghi was clear that it was not the time to comment on either the policies or the politicians.
Queried on the potential for currency wars and trade protectionism in relation to Trump’s aside that the dollar was too strong and that various trade agreements were detrimental to U.S. interests Mr. Draghi said, as he (and many other central bankers have many times over the years) that exchange rates are "not a target.” He added that the Group of 20-- formerly a force in currency politics--believes competitive devaluations should be avoided.
Although Prime Minister Theresa May elucidated some details of her strategy for exiting the EU, including submitting the agreement to Parliament, in a speech this week, Mr. Draghi also declined to comment on the process. 'It’s too early to say” what the effect of Britain’s departure will be on the EU. “Whether it will have economic consequences will depend on the shape of the outcome and the length of time it will take.”
In reference to Mr. Trump’s prediction that more countries would leave the European Union and the euro, Mr. Draghi said, “I just won’t make any comment on that. It’s just too early. Let’s see what are the real policies following these statements. I’d rather comment on policies and policy actions.” "It’s too early to comment.”
Mrt. Draghi did drive the euro down almost a figure by noting that inflation pressures in the euro area remain “subdued”, even though the annual consumer price index in 2016 rose from -0.2 percent in April to 1.1 percent in December. By mid-afternoon in New York the euro had recovered almost all its losses.
Mr. Draghi is quite sensible in reserving judgement until the policies of Ms May and Mr. Trump are formulated.
For different reasons, Ms May because Brexit was not her choice, and for Mr. Trump because his spontaneous rhetoric is unlikely to be the basis for considered policy, the actual programs that come from each government will probably be more moderate and less upsetting to financial markets than current fears predict.
Mr. Draghi has long asked that the continent’s politicians and governments bear more of the burden of supporting and reforming Europe’s economies and institutions including the euro.
Whether he meant to share the burden of the euro’s future with the European voter is another question entirely.
Chief Market Strategist
WorldWideMarkets Online Trading