Week in Review (14 June)

ECB sources reiterate Draghi’s dovish message

In our analysis of last week’s ECB Governing Council (GC) meeting, we noted that our opinion was that ‘Draghi was essentially seeking to reiterate that, if necessary – due for example to a deterioration in the economy, the ECB will act.’ While this was by no means another ‘whatever it takes’ moment, it does seem that Draghi – and at least some members of the GC – were hoping to signal to markets that further easing remains possible. The market response, however, suggests that they may not have fully appreciated this message.

In the week since the meeting, there has been a clear effort by elements within the ECB GC and staff to emphasise Draghi’s message. Olli Rehn in particular made a public intervention in favour of more dovishness at a time when he is considered as a possible candidate for the ECB Presidency following the end of Draghi’s term on 31 October.

One of the chief concerns of market participants, economists, and a range of Eurozone governments is that Draghi’s replacement will be more hawkish. We think it unlikely that in his remaining months in the job Draghi will himself be able to oversee further substantial easing measures. We believe, however, that the tone adopted by Draghi and others is an attempt to direct the policy approach of his successor.

Parliament horse trading begins, with approach of Greens watched from Berlin

On 13 June political groupings in the newly elected European Parliament began negotiations on their priorities, split across five working groups. Each contains two MEPs from across four groupings – the EPP, S&D, Greens, and RE (formerly ALDE). That these groups are already cooperating is an indication that a ‘grand coalition’ spanning all four may be the most likely outcome for the parliament as a whole.

As we noted in our 10 June report, the CDU is keen that any EU Parliament coalition contains both the EPP and the Greens. The troubles of the CDU – coupled with those of the SPD – have increased expectations of a snap election in Germany. While there has been much speculation on an SPD-Linke-Green coalition, the CDU is keen to test cooperation at European level and work towards a possible coalition with the Greens in Germany.

Mitsotakis stands firm on tax cuts

In our 12 June report we noted that, although EU figures might be glad to see the back of Alexis Tsipras and his desire for further spending, his likely replacement – New Democracy’s Kyriakos Mitsotakis – is himself promising a swathe of tax cuts should be win the forthcoming Greek election.

Mitsotakis is putting faith in a turnaround in business sentiment to fund the proposed cuts, which he described as ‘non-negotiable’ in a 13 June interview on Greek television. As we noted in our 12 June report, Mitsotakis’s hope for an economic boom will be tested by a series of ratings reviews scheduled to come in across the third quarter.