Mario Draghi declares victory over the euro
The feeling is growing that the ECB has shouldered too much of the eurozone’s burden
From his corner office on the 40th floor of the European Central Bank’s gleaming twin-tower headquarters in Frankfurt, Mario Draghi sums up how the ECB has been transformed during his presidency.
“The building embodies our values,” says the 72-year-old Italian, with a touch of pride. “Transparency and independence.”
Under Draghi the ECB has come of age. Alongside the Federal Reserve and the Bank of England, it has developed a formidable arsenal, injecting trillions of euros of stimulus into the eurozone economy to counter the effects of the global financial crisis.
Draghi, approaching the end of his eight-year term, has won standing ovations at Brussels summits. In May, President Emmanuel Macron awarded him France’s Commandeur de la Légion d’Honneur, praising him as the heir of Jean Monnet and Robert Schuman, the European project’s founding fathers.
Yet for all Draghi’s panache, the region’s economy remains fragile. And there is a growing feeling that his central bank has shouldered too much of the burden and can no longer be the only game in town.
It is a view the ECB’s president vigorously endorses. In a dig at the German economic establishment with whom Draghi has frequently clashed, he says: “I have talked about fiscal policy as a necessary complement to monetary policy since 2014. Now the need is more urgent than before. Monetary policy will continue to do its job but the negative side effects as you move forward are more and more visible.”
He adds: “Have we done enough? Yes, we have done enough — and we can do more. But more to the point what is missing? The answer is fiscal policy, that’s the big difference between Europe and the US.”
Over the course of two interviews with the Financial Times, Draghi took on his critics, highlighting the lessons of the multiyear eurozone debt crisis, his own legacy and the challenges facing his successor Christine Lagarde, former MD of the IMF. He also justified a final package of monetary stimulus that has proven controversial with the bank’s hawks, a constant thorn in his side.
The son of a central banker, Draghi enjoyed impeccable credentials for the ECB post: a long career at the Italian treasury and Bank of Italy; a doctorate in economics from the Massachusetts Institute of Technology; and a stint at Goldman Sachs, that helped him learn how to communicate with financial operators.
He arrived in Frankfurt just as the eurozone crisis was about to accelerate into a new, treacherous phase. “By the end of 2011, the credit flows to the private sector were dropping dramatically,” he recalls. Two rate cuts followed, the first within days of taking over.
As the eurozone’s economy worsened, Draghi found himself confronted with the central tension in the eurozone, one that has haunted Europe’s efforts at deeper integration since the founding Treaty of Rome: the uncomfortable trade-offs between national sovereignty and the wider collective interest.
This tension was felt most acutely in Germany, the eurozone’s most populous nation and richest economy. While the political elite, notably chancellor Helmut Kohl, had signed up to the euro as part of the Maastricht treaty, the rest of the country was more ambivalent. Nowhere more so than the Bundesbank, the postwar guardian of price stability.
The eurozone crisis worsened these tensions. Germany remained unscathed, but others, notably Greece, Italy, Spain and Portugal, were exposed because of their high current account deficits and public debt. “My argument was that they should try to see that this is not a one-country world, that this is a more complex reality than just one country,” says Draghi.
Inside the ECB board, his relationship with Jens Weidmann deteriorated fast. The Bundesbank president went public, criticising the central bank’s accommodative stimulus on the grounds that it would unleash one of the things Germans fear most: rampant inflation. Press attacks became frequent, with front covers portraying the Italian as a mafia don, setting fire to €100 notes.
Whatever his frustrations, Draghi is too diplomatic to single out the Bundesbank or Weidmann for criticism, but he implies that both are behind the times. “This mindset is the product of success. You had a very prestigious institution, the Bundesbank, with a successful monetary policy 20-50 years ago — when almost everyone else was basically making one big policy mistake after another,” he says. “But with the euro we had entered a new world. And this world was changing fast.”
In this era of low inflation, austerity and high unemployment in the region’s periphery, as well as a fragmented financial system, Draghi believes that the ECB had to intervene, with or without full support from all member states. “It would have been much better if we had had unanimity from the outset. Once I understood that was not going to be the case, it was a necessary price to pay,” he says.
There is a further stinging rebuke: opposition within the ECB exemplified by Weidmann undermined the ECB’s credibility in the markets. “The prior universal view was that the ECB was fundamentally a very conservative central bank. So, it took some time before expansionary moves could be viewed without a certain degree of scepticism. But this only reinforced our determination.”
By July 2012 the mood in Frankfurt was unremittingly bleak. Investors were turning against the euro, betting that the single currency zone’s problems were not confined to Greece. They had larger economies such as Italy and Spain in their sights. Contagion was in the air; the future of the euro at risk.
What followed has become the stuff of legend. But it was not precisely scripted and started inauspiciously, Draghi confirms. He made a presentation on July 26 that compared the currency union to a bumblebee — a thing that flies even though it shouldn’t, before turning into something beautiful. Paul Krugman, the Nobel laureate in economics, has since described the image as “dubious biology”, but Draghi recovered.
The ECB, he declared, would do “whatever it takes” within its mandate to save the euro. Then he added, pointedly: “Believe me, it will be enough.”
These words took the ECB into uncharted territory, pledging the full powers of the central bank behind the single currency. This was what many, including Wall Street, had said privately was necessary to avoid the death of the euro and another Great Crash. But it was still a giant step, something recognised by Draghi seven years on.
“I had reflected, consulted and deeply thought about the appropriate message,” he says.
The plan, described in central bank parlance as the outright monetary transactions programme, came over the course of that summer. To counter speculation of a break-up, the ECB threatened to buy governments’ bonds in potentially unlimited quantities.
“Only by bringing certainty to markets that the ECB was unwavering would it be possible to put a halt to the downward spiral. I was determined to make that point forcefully. And the markets did the rest.”
In northern member states, the ECB was accused of exceeding its mandate. This is a charge vociferously denied by Draghi, who was forced to watch his own colleague Weidmann testify against the programme in Germany’s constitutional court. But the markets bought it. What is more, the ECB has yet to buy a single bond under OMT. The mere threat of action was enough.
“The continuation of the favourable market reaction in my eyes showed that it was really a crisis of confidence that we needed to address,” he says.
One question that lingers is whether the euro can endure in its current form given the divergences within the bloc. Draghi ducks the question, preferring initially to talk about managing heterogeneity. This issue crystallised around the fate of Greece during the sovereign debt crisis.
A backlash against austerity led to the election of the hard left Syriza party. Behind the scenes, there was talk about whether to “let Greece go”. A powerful northern European camp led by Germany insisted that this made economic sense because the Greek economy was never strong enough to merit membership. Others argued it would be a disaster which, like the collapse of Lehman Brothers, would trigger panic in the markets.
The ECB was torn between keeping Greek banks afloat by providing them with liquidity and obeying its own rules. These banned the use of Greek government bonds and government-backed bonds as collateral if Athens was no longer in an IMF or European Commission-backed programme. On one issue he is clear: he never sought to force Greece out of the single currency.
Draghi says that at one meeting of eurogroup finance ministers, he pushed back at a claim by one participant — believed to be Wolfgang Schäuble, Germany’s then finance minister — that the ECB should have cut off lenders to Athens long ago. “I said, ‘look, if you want to push Greece out of the euro, then you do it, don’t use the ECB to do it’.”
Schäuble also accused the ECB of stoking the rise of the nationalist Alternative for Germany partly through its aggressive rate cuts on savers. Draghi insists that this did not contribute to the rise of populism. “We were fulfilling our duty, the treaty is asking us to take the actions we are taking to preserve the stability of the euro.”
Overall, he agrees that Greece has paid a “terrible” price, but there is hope. “[The crisis] was overcome first thanks to what the Greek citizens had been able to achieve,” he says. “But solidarity in the eurozone has been beneficial. It is very difficult for an isolated country which defaults to go back to normal.”
ECB watchers suspect Draghi would have liked to have finished his term by ending the stimulus, proving incontrovertibly that his actions worked. In fact, while the acute point of the eurozone crisis has passed, chronic problems remain. Draghi blames external factors such as President Donald Trump’s trade conflict with China and the risk of a hard Brexit, but internally the eurozone remains vulnerable. Unemployment in the south is still high, especially among the youth. The region’s economic engines such as Germany and the Netherlands have stuttered, their exporters under pressure.
The package unveiled earlier in September will see the resumption of a €2.6-trillion quantitative easing programme that was supposed to end for good last December. The ECB has committed to spending €20bn a month until inflation shows signs of nearing its target of just under 2%. It has also cut rates to fresh all-time lows and signalled that borrowing costs will remain ultra-loose for years, with no calendar cut-off.
The programme, which Lagarde was informed of, led to objections from nine of the council’s 25 members — seven subsequently voted against it — chiefly over the decision to restart QE. Among the nine were governors from countries representing more than 50% of the bloc’s economic output.
Elements of the German press hit out. Bild, the most popular newspaper, portrayed Draghi as a vampire sucking the blood of the country’s savers in the following day’s edition, the day after carrying an interview with Weidmann in which he said he would raise rates as soon as possible. The Dutch central bank chief, Klaas Knot, who like Weidmann lost out to Lagarde for the ECB job, published a statement saying the package had gone too far.
Draghi defends the programme as necessary. “The outlook has worsened, especially for manufacturing. Inflation was no longer on track to meet our target,” he says, adding that the policies will work, albeit at a slower pace than if governments were spending more.
He agrees with Macron that it is time to back a new common eurozone budget — a transformational and “existential” development to complement monetary policy.
What gives him comfort, he says, is that the ECB’s record in the crisis years has built an enduring legacy. It is not about the man, but the mandate itself which, he implies, his successor will be obliged to respect.
Opponents of the euro — the sovereigntists — have lost, he says. They were defeated in the battle for the euro in the Greek crisis and they lost the political battle in the European Parliament elections in 2019.
“All policy decisions depend on the circumstances, but I have no reason to think that people who are going to be sitting in those chairs in the coming years will interpret the extent of our mandate in a way different from what the governing council that met in the summer of 2012 actually did.”
He adds that Lagarde will be an “outstanding” ECB president. “She has successfully led the IMF and its staff of economists through challenging times.”
With that, Draghi ends his term with the quiet satisfaction of a mission accomplished — for now.
© The Financial Times 2019