On 28th of October 2019, Mario Draghi gave his last speech as the European Central Bank president, passing the baton to Christine Lagarde, former head of the International Monetary Fund.
Since the start of his mandate in 2011, he led the ECB during its hardest years until now, writing an important chapter for the Euro and being recognized as the man that saved the euro.
During his presidency, the ECB made lots of reforms and pioneered new monetary policies, allowing space for european government to continue being in the currency union.
Mario Draghi became president of the ECB in November 2011, right in the middle of the economic crisis in Europe. Some years have passed since then, but remember that during those times many people questioned about the survival of the eurozone, countries went close to default and many took into account to give up the currency.
All this uncertainty lead to borrowing costs to soar enormously, with investors anticipating the possibility that countries might leave the euro and pay their debt with devalued national currencies.
In the midst of this crisis, the ECB made its move shifting its monetary policy with the famous announcement that made Draghi the italian banker that saved the euro.
Whatever It Takes
In a speech in London, on the 26th of July 2012, he delivered a strong message to the financial world saying:
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
This was a cornerstone for the euro as a currency and the european union as a whole. After this speech, the ECB went into an unexplored territory performing Outright Monetary Transactions (OTM).
With OTM, the ECB was able to buy on the secondary market bonds of european countries that needed help, subject to certain conditions. With LTRO and TLTRO operations, borrowing costs for governments came down to more manageable levels.
The expectations shifted towards low interest rates for a long period of time and since then, the ECB started to use forward guidance to conduct monetary policy, basically giving informations about future moves in monetary policy, inflation and prices stability.
Draghi played a pivotal role for the stability of the EU, the ultra-loose monetary policies represented a lifeline for EU governments.
In a recent lecture he pointed out that “What gave us the courage to act was the conviction that there was a far greater risk if we did nothing. […] When the effect of inaction would be to compromise the mandate conferred on the policymaker by the legislator, the decision not to act is a decision to fail.”
After OTMs, slow economic growth and levels of inflation persistently below the ECB’s target (below but close to 2%), resulted in dramatic actions to resolve the problem.
In 2015, Mario Draghi announced the next big move of the ECB: an expanded asset purchase programme, or quantitative easing (QE).
Quantitative easing is the creation of new currency by the central bank and the subsequent purchase of assets on the market. While with LTRO and TLTRO there wasn’t any permanent creation of currency, the quantitative easing translated into an expansion of the ECB balance sheet.
Since March 2015, the European Central Bank started to buy €60 billion per month of euro-area bonds from central governments, agencies and european institutions.
Originally planned to end in 2016, it was prolonged and reinforced (from 60bn to 80bn per month) and is still going on today.
In addition to this move, the ECB cut the interest rates down to zero and made everything to carry on a super accommodative monetary policy.
Draghi’s Legacy and the Future for Europe
Mario Draghi gave his crucial contribution and has been a key player in the innovation in monetary policies that followed the financial crisis. He wrote an important chapter of monetary history and certainly made the difference for the euro.
While there has been economic growth since 2013, it is very weak and lots of uncertainties start to arise. Countries like Germany are approaching recession and many others are full of debt, that makes them potentially fragile during an economic pullback.
In this scenario, the inflation continues to remain below the ECB target and many started to realize that quantitative easing and zero interest rates can provide some help during the process but are not the solution to EU problems. (on this topic, you might be interested to read this article).
In the last speeches of Mario Draghi, he gave us lots of information outlying what could be considered a roadmap of improvements for the still fragile currency and the reinforcement of the European Union. This could represent the best areas to concentrate on to follow-up with his policies.
Although the euro area is much more stable, there is still a lot to do to complete the project of a single currency. Proposals include a single deposit guarantee to make all depositors feel the same level of safety and capital markets union, to foster cross-border ownership of European companies.
Another proposal (maybe the hardest), is the creation of a single eurozone fiscal budget. Using Draghi’s words: “We need an additional fiscal instrument to maintain convergence during large shocks, without having to over-burden monetary policy. Its aim would be to provide an extra layer of stabilization, thereby reinforcing confidence in national policies.”
While I think it is crucial for the monetary union, and it is easy to agree with this view, the realization of this system isn’t easy at all. It has thousands of legal and political implications, not to mention contrasts between countries, especially between “north and south” of Europe.
As Draghi pointed out in his farewell speech “For us Europeans, in a globalised world, a true sovereignty that meets people’s needs for security and prosperity can be achieved only by working together”. In the end, what can really make the difference, is the commitment of governments to do the reforms and work towards a higher level of integration.
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This article is for informational purposes only, it should not be considered financial advice. You can read the full disclaimer here.