Can The ECB Stop Populism And What To Expect

The European Central Bank’s job is to keep the Eurozone intact, promote growth and reduce unemployment.

Higher unemployment and lower GDP growth rates are the ideal foundations for the spread of populism, which started with Brexit last year before spilling over into the US and now we have this same disease over in France. Although Macron is highly likely to win the French elections, you cannot underestimate the element of surprise witnessed in these elections.

The ECB has done a marvelous job in rescuing the Eurozone from its double-dip recession and reducing the unemployment rate. This has taken some of the steam out of the populist march to power across Europe. If you think that after French elections we will be out of the woods with Macron leading the country, then you are certainly wrong. Look at the Italian and German 10 years bond spread, it has started to soar due to the fear that the five- star movement party, which broadcasts an anti-European narrative, could impose a threat to the Eurozone if they get into power.

The ECB in its meeting today will have to assure the market that they are aware of these threats and they are not going to let their guard down at any cost. Although, the ECB could always argue that economic growth or unemployment figures are not the major factors driving the current wave of populism because the economic health of both the US and in the UK was much better when these countries decided to support a populist ideology.

While political parties across Europe continue their battle on this uncharted terrain, investors would still like to know more about Draghi’s plan to ward off his ultra-loose monetary policy. The hawks are going to start beating their drums loudly after the French elections and ask the ECB to start thinking about tapering.

What we are expecting from the ECB today is for them to pledge to keep the interest rate low and to back their on-going commitment to buy back assets as the risk skews towards the downside. There is no denying that GDP growth has picked up and it is at 1.5% but still well below the ECB target of 2%. Similarly, the Eurozone composite PMI is also performing much better than the previous quarter, currently coming in at 55.6%. However, the reason why everything is not golden is that industrial production during the period from January to February was weaker in comparison to the fourth quarter’s average.

Therefore, by the time the ECB start to think about their dovish tapering, we may see the autumnal colors donning the trees. At that stage, we will have also seen the impact of the UK’s election and the tone of the Brexit negotiations. We would expect the ECB to start slowly and keep it very gradual by scaling 10 billion euro from their monthly purchase back.

Can The ECB Stop Populism And What To Expect

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