Why Trump has a point about Draghi and euro
The euro area economy is in a real bind, as Mario Draghi admitted at this week's European Central Bank summit in Portugal. So he won't have been too thrilled that his suggestions on how to respond were subject to a rapid and damning response from the world's most famous Twitter account:
"Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others," the US President tweeted. Later, he added: "German DAX way up due to stimulus remarks from Mario Draghi. Very unfair to the United States!"
The messaging from the White House was as economically crude as ever (and monumentally rich, in the context of the vast stimulus on offer in the US over recent years), but in fairness President Trump did manage to highlight one of the biggest risks to the European economy: A stronger euro. Indeed, while the ECB is always at pains to stress that the value of the euro lies outside its remit, the currency surely figures highly in the minds of the bank's decision-makers.
Mr Draghi is now emphasising rate cuts rather than making a concerted effort to restart quantitative easing (the large-scale purchasing of bonds).
It was a policy mistake to end QE at the end of last year given the fragile state of Europe's economy, but it would take a lot of time to renegotiate its reintroduction with the eurozone's central bankers. Targeting borrowing rates is simpler and quicker. As negative rates have been around for a long time already, it's hard to have much faith in them helping to fix the ECB's weak inflation problem. But they can serve one important purpose: Preventing the euro from rising.
If the euro strengthens substantially, it will choke off any chance of Europe's export-led economy recovering from what's becoming a prolonged slump and it might precipitate a recession. Trump's trade wars have only added to the woes of local manufacturers, with Germany suffering badly.
The ECB does not want to see the euro rise back to last year's highs.
The ECB will of course couch any rate cuts in terms of correcting inflation expectations that have fallen to record lows (although Draghi's speech did at least prompt a slight rise in those forecasts). The brutal reality is that additional monetary stimulus will have little effect on boosting European inflation, which is being held back by global disinflation.
The omens for the euro area economy certainly don't look promising as even the yields on French 10-year notes have fallen below zero. This is not a sign of market confidence. Inflation expectations rose on Draghi's remarks but bond yields hit record lows.
All of this points to an important argument made by my colleague Ferdinando Giugliano, and which reflects the frustrations of Draghi himself as he prepares to step down in the autumn. The ECB should not be solely responsible for stimulating growth - Europe's political leaders need to step up too.
The single currency area is crying out for a proper fiscal policy, but politicians seem determined to wait for another crisis before galvanising a credible response such as a proper joint budget.
It would be unfortunate if a currency spat with Trump was the catalyst for driving the euro stronger.