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The Trump Tweet and the Draghi Euro



From time to time, it happens to the best: Mario Draghi was on Tuesday at the receiving end of President Trump's Newest

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Rocket. Mr Trump accused the head of the European Central Bank of conducting a new currency war, and in a Trump tweet characteristic both sides are wrong. Trump's latest monetary detonation took place after Draghi's speech that the ECB could further boost the eurozone economy if needed. The confirmation that the ECB is considering a cautious reversal in the final days of Mr Draghi's term led to a 0.5% reduction in the value of one euro to less than $ 1.12. European equities gained as bond yields fell. Mr. Trump says this rapid currency devaluation "makes it unfair for them to hold their own against the US".

Mr. Trump. Draghi should understand that Mr. Trump's ultimate goal is chairman of the Federal Reserve's Jay Powell, whose Open Market Committee will meet this week. He wants Mr. Powell to lower US interest rates. The President's complaint is also somewhat broad, given that one of the main economic threats to which Mr Draghi is responding is Mr Trump's multi-front tariff offensive.

The ECB is also in conflict as the Fed may lower rates this week or later this year. All modern central bankers are trying to operate an unconventional monetary policy without a roadmap and without international coordination. Excuse Mr Draghi for suggesting that he will not be out of synch with the Fed until now.

However, it is also true that the devaluation of the euro has been a clear, if undisclosed, goal of Mr Draghi's policy for years. From around $ 1

.40 in 2014, the euro fell to around $ 1.05 by the end of 2015, when Mr. Draghi introduced his QE, and he recently settled for $ 1.12.

The hope seems to have been that a weaker euro could stimulate some inflation in import prices and give European exporters a boost that would politically facilitate domestic economic reforms. Neither has happened. Import prices never rose enough to reach the ECB's targeted inflation rate of nearly 2%, while any export boost benefited primarily economies such as Germany, which needed the least amount of aid. Significant reforms were never carried out, except late and still inadequate in France.

A working paper by Berkeley Professor Andrew Rose from 2018 examined the unconventional monetary policy of the EU and the Fed, stating that it did not increase exports. "Countries with quantitative easing and / or negative nominal interest rates just did not experience an export boom," Rose wrote for the National Bureau of Economic Research.

The Trump warning to Mr. Draghi and his successor, however, is that Washington will consider further attempts at competitive devaluation less critical. Not that it matters, since it is not obvious that Mr. Draghi's successor can still follow the Draghi game book.

Mr. Draghi has behaved so far what additional accommodation the ECB could offer, also because the menu is short. It could further lower the ECB's key interest rates, even though the interest rate on bank reserves is already a profitable minus of 0.4%. The direct subsidies for lending through various TLTRO programs (do not ask what they stand for) have not provided the desired economic incentive.

Investors call for a resumption of bond purchases by the ECB or quantitative easing that was discontinued in December. However, this will put the ECB in a new political minefield as it is already approaching its self-imposed limit of not owning more than 33% of the debt issued by a country. The lifting of this cap will trigger new objections from long-time QE critics, especially in Germany, and potentially involve the ECB as a significant minority stakeholder in various debt securities in disorderly political and legal struggles.

This is what Mr Draghi is doing for the time being, as he did on Tuesday – trying to rebuke the markets, rebel the euro and go beyond the practical limits of the ECB. However, there are limits to this strategy, as Draghi has always been the first to warn. Domestic reforms to revive labor and product markets and stimulate business investment have been the missing ingredient in the European economy for decades. Without them, Europe is struggling to achieve sustainable growth with every exchange rate.

Mr. Trump is right that the Eurozone has tried to devalue competition as a substitute for harsh reforms, but wrongly thinks it works for Europe. He is also wrong to believe that it would work for the US.


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