Can Draghi Balance Economic Demands?

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Mario Draghi, president of the European Central Bank, has a job in front of him that few would covet. The first rate-setting session of the central bank is set to meet Thursday, and recovery in the eurozone will be a major focus at the meeting. Bloomberg reports that there are concerns on whether reviewing loans and beginning to chip away at debt could lead to poor bank reaction that could hurt the European recovery.

Draghi has conflicting goals, needing to accomplish monetary easing while also controlling banking in the eurozone so that capital gaps aren’t dealt with using liquidity in a damaging way. Finding the right policy balance will be a challenge.

“The ECB’s bank assessment will have a dragging effect on credit lending, deteriorating an already bad situation. They could counter this by providing incentives on the monetary-policy side, for example conditional long-term loans, but such a move isn’t straightforward,” Ebrahim Rahbari, an economist with Citigroup, toldĀ Bloomberg.

The ECB will announce its plan for the interest-rate on Thursday at a news conference in Frankfurt, and Draghi will speak to the press shortly after. The ECB reduced its credit rates two times last year, but credit to both homes and businesses in the euro area continued to fall. Draghi said that he will keep rates where they are or possibly reduce them further, perĀ Bloomberg.

“The ECB’s first priority should be to fast-track cleaning up the banking sector so that supply constraints, such as bad loans on bank’s balance sheets, no longer impair the flow of credit. Currently we think deflation risks do not warrant further easing, but the situation is critical,” said Andrew Bosomworth of Pacific Investment Management Co. to the news service.

The ECB put 1 trillion euros ($1.4 trillion) into banks during the debt crisis between 2011 and 2012. However, most banks put the money toward buying government bonds instead of the much-needed lending they could have done, something the central bank says it will prevent in future.

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