The euro has slipped to a four-and-a-half year low today after the dismal comments of European Central Bank boss Mario Draghi in a New Year’s interview that is now doing the rounds of the world’s media.
Affirming that Europe faced a “long period of weakness more than a crisis”, Draghi explained that the “growing risk of price instability” within the eurozone has a lot to do with the plummeting price of oil and the failure of governments to lower taxes and implement structural reforms.
Deflation – the point where prices fall so far that they strangle economic growth – is a possibility, but danger is limited, he stressed.
The ECB has a raft of measures in hand and is aiming to get inflation back up to healthy levels as soon as possible.
The problem is that even with these measures in place, the risk that the ECB may fail its price stability mandate “has increased compared to six months ago”, he warned.
Thus the ECB is seriously considering QE (quantitative easing) – the large-scale purchase of sovereign debt or, as financial journalists call it “electronic money printing”.
It is a policy used by other central banks to help jump-start moribund economies but one which the ECB has shied away from thus far, not least because Germany is dead against it.
Critics see QE as a licence to print money, which the ECB is strictly forbidden from doing under its statutes.
But where the situation leaves Portugal – with its high taxes, slow-moving structural reforms and precarious level of public debt – remains to be seen.
For now, Draghi’s interview is being screened on the nation’s televisions and no doubt commentators will lay into the implications later this evening.
