By virtually all metrics, the eurozone economy is in rude health. The latest PMI reading exceeded analysts’ expectations thanks to a booming services sector but, in spite of European growth consistently beating estimates, the ECB is scarcely closer to achieving its mandate of close to, but below, 2% headline inflation.
The ECB is in a dilemma. Does it buck the emerging trend of global monetary policy normalisation, prolonging the asset purchase programme in an attempt to kick-start sluggish price growth? Or does it look at a healthy economy and conclude that its job is done?
As the euro strengthens, the latter course of action becomes less appealing, as an end to quantitative easing would push the euro up still further and risk damaging Europe’s exports and stalling the region’s newfound growth.
As if a euro driven upwards by a strengthening economy were not enough, the ECB must also contend with comments from Mnuchin that pushed the dollar down, whether or not they were intentional currency manipulation.
The ECB president was right to criticise Mnuchin’s behaviour in his press conference on Thursday, although he could do so only obliquely. Even if the Treasury secretary did not intend to weaken the dollar, his comments were irresponsible.
A currency war would help no one and we must be grateful for Draghi’s discipline in refusing to resort to cheap manipulative tactics, even when doing so might seem to smooth his road.