Troubles at the ECB Aren’t Draghi’s Fault
(Bloomberg Opinion) -- Given last week’s news of grumbling among members of the European Central Bank’s Governing Council and the resignation of a board member, it seems Mario Draghi’s last month as president might be marred by internal policy divisions. This would be a sad misunderstanding.
Sad because Draghi’s legacy should be centered on his courageous action to save the euro zone (along with the common currency that symbolizes ever closer European economic and social integration), and misleading because the policy differences at issue have less to do with the ECB than with what little European policymakers have done to support the economy.
When asked at his September 12th press conference about the process leading to the ECB’s latest set of policy decisions, Draghi said no vote of approval had been required because there had been a “clear majority” in favor of the actions taken. Subsequent revelations suggested that this may have been a less-than-comprehensive answer.
More detailed reporting suggested that 10 of the 25 decision makers had issues with some elements. And several of the dissenters — who together represent more than half of the euro zone’s GDP — have taken the unusual step of publicly expressing their opposition. In addition, last week, Sabine Lautenschlager, a German on the bank’s executive board, resigned, and news reports said she did so over sharp differences with Draghi.
The political backlash is sure to intensify in the days and weeks ahead. After all, who will forget the front cover of Bild, the popular German tabloid, portraying the ECB president as “Count Draghi” for sucking interest income from German savers with his “QE infinity” and negative policy rates.
Such are the increasing costs and risks of relying on the ECB alone to improve the European economy. Slowing economic growth and the rising risk of outright recession only render the situation more treacherous. But this should not detract attention from Draghi’s important accomplishments — and not only because it would be unfair. It would also mislead Europe about what policy actions are needed going forward.
Recall the existential risk the euro zone faced seven years ago as it grappled with a deepening debt crisis. On July 26, 2012, Draghi took to the stage during a London conference organized by the U.K. government. I was sitting in the audience to his left and remember the impact of his asserting that the ECB was “ready to do whatever it takes” to preserve the euro. “Believe me,” he insisted, “it will be enough.”
His remarks turned out to be a pivotal. They acted as a circuit breaker for what was an increasingly vicious cycle of financial dislocations tearing at the fabric of the monetary union. Draghi’s words enabled the euro zone to reset and laid the foundation for broader policy strengthening. Unfortunately, policymakers outside the central bank failed to follow suit.
Draghi’s comments were more a bold personal effort than a collective decision by the ECB Governing Council. After speaking, he went back for his ECB colleagues’ support, which some were initially reluctant to give. In this way, Draghi managed to stabilize the situation without costing the ECB a single euro.
Another big challenge was yet to come. Europe still lacked a complete banking union and any proper fiscal integration. Member countries continued to do little to carry out pro-growth structural reforms, or couple monetary policy with budget stimulus.
Draghi was the one senior European policymaker who consistently urged a more comprehensive approach. In the past year he has gone out of his way at every press conference to make the case for structural reforms and selective fiscal expansion, and for completing the euro zone’s economic and financial architecture. His words have repeatedly fallen on deaf ears.
With the ECB having little choice but to continue its unconventional measures, it was only a matter of time before excessive reliance on them threatened to do more harm than good. It’s no wonder that differences within the ECB have become harder to manage internally, and harder to contain externally.
Draghi should not be blamed for this. Rather, the month leading to his departure from the ECB should be a time of reflection on Europe’s need for courageous economic leadership. A comprehensive policy approach is still needed to enable high and inclusive growth, and genuine financial stability.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."
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