Donald Trump has a point about Draghi and the euro

The euro area economy is in a real bind, as Mario Draghi admitted at European Central Bank (ECB) summit in Portugal. So he won’t have been too thrilled that his suggestions on how to respond were subject to a rapid and damning response from the world’s most famous Twitter account.
“Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others”, tweeted Trump.
The messaging from the White House was as economically crude as ever (and monumentally rich, in the context of the vast stimulus on offer in the US over recent years), but in fairness President Trump did manage to highlight one of the biggest risks to the European economy: A stronger euro. Indeed, while the ECB is always at pains to stress that the value of the euro lies outside its remit, the currency surely figures highly in the minds of the bank’s decision-makers.
Draghi is now emphasising rate cuts rather than making a concerted effort to restart quantitative easing. It was a policy mistake to end QE at the end of last year given the fragile state of Europe’s economy, but it would take a lot of time to renegotiate its reintroduction with the euro zone’s central bankers. Targeting borrowing rates is simpler and quicker. As negative rates have been around for a long time already, it’s hard to have much faith in them helping to fix the ECB’s weak inflation problem. But they can serve one important purpose: Preventing the euro from rising.
If the euro strengthens substantially, it will choke off any chance of Europe’s export-led economy recovering from what’s becoming a prolonged slump and it might precipitate a recession. Trump’s trade wars have only added to the woes of local manufacturers, with Germany suffering badly.
The ECB will of course couch any rate cuts in terms of correcting inflation expectations that have fallen to record lows. Sadly, the brutal reality is that additional monetary stimulus will have little effect on boosting European inflation, which is being held back by global disinflation.
The single currency area is crying out for a proper fiscal policy, but politicians seem determined to wait for another crisis before galvanizing a credible response such as a proper joint budget. It would be unfortunate if a currency spat with Trump was the catalyst by driving the euro stronger.

—Bloomberg