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AB 2000 studies

Alain Boublil Blog

 

Thank you Mr. Draghi

Last Thursday, the European Central Bank has announced the main orientations of its monetary policy for the next year. They have been clarified by the comments added by its president, Mario Draghi. We have, now, a clear indication about the evolution of the eurozone during the coming months. Markets made no mistakes about it. They immediately reacted: European stock markets, except Spain due to political reasons, rose and the euro fell. The currency lost more than 1% against the dollar.

First, the ECB announced that it will prorogate until September 2018 its quantitative easing policy but for amounts reduced to 30 billion euro per month compared to 60 billion until the end of this year. It even added that nothing impeached it to extend it further if it was necessary and that the ECB could even, regarding assets coming at maturity, reinvest them in new bonds purchases. When it was decided in 2015, the amount was 60 billion euro until September 2016 but it had been increased to 80 billion before being reduced to its initial level. Mario Draghi has also said that no interest rate hike was forecast during 2018 and that the first one will come in 2019. Markets have interpreted that message as a guarantee for very low and even negative interest rates until at least 2019 summer. The ECB doesn’t want to make the same mistake than in 2008 when it did increased its rates just before the Lehmann bankruptcy and the triggering on the markets of the worst financial crisis since 1929. Mario Draghi has also said, in his comments, that there were no limits regarding duration of its accommodative monetary policy. To end it, it would be necessary that targets regarding inflation (near but lower than 2%), employment and growth in the eurozone were reached. We are far from that.

The council of Governors was not unanimous. Opponents to that policy, Germany and the Netherlands first, did not get the possibility to make their vision adopted. Pension systems in both countries are based on funds whose returns are affected by the persistency of very low long term interest rates which put in danger, especially in Germany due to the rapid ageing of the population, pension levels. Mario Draghi took advantage of the political vacuum in the country after to last elections. A new government has not yet been appointed. The adopted political line will depend on the alliances and the compromises Chancellor Merkel will have to accept. Atop of that, the most prominent support of hawkish policy at the ECB, former Finance minister Wolfgang Schaübble has left his functions to be appointed chairman of the Bundestag, a quite honorific position. The ECB president had the field free. Regarding France, the pursuit of an accommodative policy by Frankfurt is excellent news, for the State, the enterprises and the households.

The State will be the most important beneficiary, though, as a paradox, it does its best to limit its impact. Regarding Brussels, it doesn't want not be accused of laxness if the country wants to get out of the excessive deficit situation. On internal issues, the too much high level of the public debt is used to make unpopular measures be accepted. But the State will have to adjust its calculations, if it doesn’t want its 2018 budget to being accused of insincerity. Debt charges were based on an evolution of short term interest rates reaching at the end of 2018 -0.1% and for the long term (10 years) 1.85%. These forecasts are now obsolete and it will result from the new interest rates trend a reduction of the debt costs in 2018 and especially in 2019. But there is more. The State will have to manage its debt and its issuances in that new context. Short term rates being negative and generating receipts, it will be necessary to not come back to the absurd policy consisting in issuing bonds carrying above market interest rates as in 2015 and 2016, in order to reduce the level of the short-term debt size. Fortunately it was abandoned in 2017. Short term borrowing will continue to carry negative interest rates and offers receipts. The confirmation of the abandon of that policy will also permit an acceleration of the reduction of the charge of the debt in the coming years. At the end, the State will also have to think twice before issuing debt indexed on inflation, the French one and the European one, because it creates a risks on the long term when the advantage, regarding interest rates is, in the current situation, marginal. Last, but not least, is it a good management practice to sale stakes in companies which pay dividends much higher than the cost of the State debt in order to reduce the level of that debt?

Companies will also take advantage of the continuation of favorable financing conditions. The transmission to real economy of the monetary policy was long to come due to the constraints weighting on the banks balance sheet after the financial crisis. They had to toughen their lending and investment policies. The reduction of company financial costs is starting to produce its effects and is not having anything to do with the investment rebound observed in France since 2016. The continuation of that trend will be favorable to growth on the condition that low rates are not used to finance an unlimited acquisition policy in France and abroad, as it happened twenty years ago but which had disastrous consequences in some activities and a global negative impact on employment.

Households will also profit from these low rates. The re-negotiation of their real estate loans will continue and the millions of indebted families, thanks to the reduction of their reimbursement charges will enjoy an immediate and durable improvement of their purchasing power, which will reduce wealth differences between generations. New families will be able to acquire their home. Home building is in a full rebound with more than 400 000 housing starts this year, 17% more than in 2016. It will not be enough to reduce the persisting shortage  but that one frequently results from urbanism local policies which lead to the desertification of the center of cities and the growing number of vacant homes. But the construction rebound will have a positive impact on activity and employment.

At the end, Mario Draghi decisions will put an end to the appreciation of the euro, at least temporary, which will favor exporting companies and will incite tourists from outside the eurozone to come to France. All these advantages are thanks to the euro and to Europe. At a time when they are both the target of attacks, almost everywhere, from populists, extremists and secessionists, political leaders would be well inspired to give back to Europe what it belongs to it and to show to the French people all the advantages they get in having a stable and solid currency and low interests rates which profit to everybody.

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