Finance and economics | The next economic battleground

Donald Trump takes aim at Mario Draghi over interest rates

America’s president complains that the euro zone’s monetary policy is unfair

|SINTRA

MARIO DRAGHI was certainly hoping for a reaction when he stood up to speak at the annual conference of the European Central Bank (ECB) in Portugal on June 18th—but perhaps not from the world’s most powerful man. Mr Draghi announced that the ECB stood ready to ease monetary policy if the euro area’s economy did not improve. Hours after he returned to his seat, President Donald Trump denounced him on Twitter for “making it unfairly easier for them to compete against the USA”. The Europeans, he claims “have been getting away with this for years, along with China and others.”

The outburst shows again that Mr Trump views interest rates and exchange rates, and not just the trade tariffs he likes to brandish, as weapons of economic warfare.

By declaring that the ECB had “considerable headroom” to ease monetary policy, Mr Draghi was trying to convince sceptical investors that the central bank would be able to boost the euro area’s flagging economy. He seemed to succeed for a while; the euro fell by 0.5% against the dollar on his comments as investors anticipated further stimulus in the coming months. (It made up much of the fall later in the day, though.)

The market reaction riled Mr Trump: unusually, he singled out “Mario D” for attack. But he has complained about a weak euro before. In July last year he blamed both the EU and China for manipulating their interest rates and exchange rates. Accusations that central banks engage in competitive devaluation are not new, and have even been lobbed at America in the past. When the Fed expanded its quantitative-easing programme in 2010, a number of countries intervened to devalue their currencies, prompting Guido Mantega, then Brazil’s finance minister, to coin the term “currency war”.

Mr Trump’s criticism of the weak euro—and therefore of the strong dollar—may have been strategically timed. Over the next two days the Federal Reserve meets to discuss monetary policy, and Mr Trump has called frequently for interest rates to be cut. But since the Fed is independent in its rate-setting, he has no direct influence over its decision, let alone the ECB’s. Asked whether he was starting a currency war, Mr Draghi responded that his only objective was to achieve the bank’s inflation target. “We don’t target the exchange rate,” he said. His audience burst into applause.

Mr Trump can, though, decide to initiate new trade hostilities with Europe. A decision on whether to increase levies on America’s imports of cars is expected by November. If Mr Trump thinks America has been treated unfairly by the ECB, that might make him more disposed to do so. But the ECB’s monetary easing is not a zero-sum game. Although looser policy does work partly through a weaker exchange rate, its effect on boosting the euro area should also create more appetite to buy American motorbikes and bourbon.

If Mr Trump were to use exchange rates as a reason to whack tariffs on imports from Europe, that could prove self-defeating. The euro zone’s economy would take another knock and Mr Draghi would be forced to inject even more stimulus, pushing the euro down further. Indeed the ECB thinks businesses’ fear of American protectionism, as well as a slow-down in global trade, is already taking a toll on the euro zone. Ironically, Mr Trump might be part of the reason Mr Draghi had to stand up today in the first place.

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