Judging a central banker’s record is notoriously difficult, particularly in the years immediately following their term. But for Mario Draghi, who departs from the ECB presidency this week, the most significant moment of his premiership is easy to pinpoint.
Draghi’s promise to do “whatever it takes” to preserve the euro, made at the height of the sovereign debt crisis in July 2012, marked a turning point for the eurozone. At the time, borrowing costs for indebted countries like Spain and Italy were spiking, investors were avoiding euro assets like the plague, the bloc was threatened by deflation, and the economy had fallen into recession. In short, the future of the single currency was seriously in doubt.
The “whatever it takes” speech changed all that. Virtually immediately, credit spreads started to narrow, sovereign bond yields fell, and the euro stabilized. It would be another couple of years before Draghi managed to convince the rest of the ECB’s leadership to implement drastic policy moves like quantitative easing and negative interest rates. But his obvious determination restored confidence to the market – and, as we now know, the single currency endured.
Draghi’s legacy seems uncertain
Fast forward seven years, however, and Draghi’s legacy seems much more uncertain. As he prepares to hand the organisation over to Christine Lagarde, concerns about recession and deflation are once more stalking the eurozone.
Even more problematic is the lack of ammunition left in the ECB’s arsenal. Draghi’s response to the sovereign debt crisis may have expanded the central bank’s set of policy levers, but it has also pushed them to their useful limit. At his final ECB meeting in September, the outgoing president announced a new round of monetary stimulus that took the bank’s deposit rate to -0.5%. Meanwhile, the quantitative easing scheme that was closed in 2018, following bond purchases of €2.6 trillion, will be restarted from November with further purchases of €20 billion per month.
There are at least two important points to consider here. The first is that policy tools that would have been unthinkable even a decade ago are now being deployed at a time of relative stability. True, there are legitimate concerns throughout the eurozone that economic growth may be flagging, and inflation remains lacklustre. And yet the bloc is hardly in crisis. Should one materialise, it is difficult to see where monetary policy has left to go.
A fractured ECB
More disturbingly, Draghi’s final salvo was fired against the backdrop of an increasingly fractured ECB. Back in 2012, the initial promises of drastic action were followed by two years of deliberation and consensus building before interest rates were finally taken into negative territory in 2014. Meanwhile, last month’s announcement was made against the advice of the ECB’s own officials and with the heads of the German, Austrian, French and Dutch central banks coming out in public against it.
In short, Lagarde faces an unenviable task when she takes the helm later this week. Indeed, she herself seemed to suggest during her first appearance as president-elect of the ECB that monetary policy was close to the limit of what it can do to stimulate the economy. Few will argue with her on that front. But her proposed remedy – greater centralisation of eurozone fiscal policy, achieved by strengthening the currently “embryonic” eurozone budget – is a Pandora’s Box itself. Fiscal union in the eurozone would require either political union or taxation without representation. To put it mildly, it would be a brave European politician who put either option in front of their electorate. Draghi may have saved the euro in 2012, but whether his solution can stand the test of time remains to be seen.