Twiddling thumbs in Ljubljana

At today’s meeting in Slovenia, the ECB left interest rates unchanged. Next steps in the Eurozone crisis will again have to come from governments.


The ECB’s macro-economic assessment was almost a verbatim copy of last month. As regards economic growth, the ECB just confirmed what everyone knows: “economic growth in the euro area is expected to remain weak”. The economy is expected “to recover only very gradually”. The sentence that growth should “remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery” indicates that the ECB is prepared for a long period of below-trend growth in the Eurozone. As regards inflation, the latest increase in headline inflation was, according to the ECB, not a threat to medium-term price stability. Risks to price stability remained balanced. Against this still dire economic outlook, a rate cut in the coming months is still possible, although the ECB currently rather seems to be banking on the non-conditional measures to do the job.

As expected, a large part of the press conference was again dedicated to the OMT programme and some clarifications. ECB president Draghi was obviously satisfied with the positive market reaction in September. He reiterated that the “euro is irreversible”. Besides the well-known repetitions of the conditionality principle for the OMT, Draghi mentioned two new details of the OMT: First, on the issue of whether countries already in a bailout programme could also be subject of bond purchases, Draghi said that the OMT could not be applied “until full market access will be obtained”. This was slightly different from last month’s wording which said “[OMT] may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.” It remains unclear whether the ECB would be willing to start the OMT for Ireland and, particularly, Portugal. Second, according to Draghi the ECB would not purchase bonds under the OMT programme while a country is under review. Given the length of earlier review periods, this clearly decreases chances that Greece could ever be subject of OMT bond purchases.

Today’s ECB press conference was one of the many moments in which the ECB tried to play the ball back to politicians. Draghi ducked the question on legacy assets in future bank recapitalisations by the ESM and also repeated his calls upon governments to continue implementing austerity measures and structural reforms. Interestingly, Draghi was less outspoken on the bigger picture issue of further Eurozone integration. It seems as if Draghi has dropped the “vision thing” he still had been pushing before the summer. A clear sign that Draghi has become more realistic, acknowledging that implementing some elements of a later vision thing in the coming months would already be an enormous achievement.

All in all, the ECB realises that there is hardly anything they can do at this juncture. With the OMT, the ECB has tackled and exorcised fears of an imminent Eurozone break-up. More monetary stimulus, standard or non-standard, to support growth is still in the offing but the fundamental work has to be done by governments. For the time being, the ECB can lean back, watch and twiddle thumbs.