(Bloomberg Opinion) -- Mario Draghi has spent much of his time as president of the European Central Bank fighting crises. So he hasn’t had much time to consider his legacy, even now that he’s less than five months away from retirement.
Yet in his last appearance as president at the ECB’s yearly shindig in Portugal, Draghi was in reflective mood about what’s been achieved by the central bank and the euro zone’s governments in terms of safeguarding the future of the single currency. While his own organization scraped a pass mark, the bloc’s leaders were judged more harshly – and with good reason.
The ECB chief sounded particularly exasperated by politicians’ foot-dragging over the creation of a common budget for euro members, which would help them stabilize weaker economies if they faced a shock. Euro zone finance ministers announced the first steps toward such a fund last week. Draghi is justifiably unimpressed.
While the ECB’s monetary policy has played a similar role to that of the U.S. Federal Reserve in supporting the economy, Draghi argued, Washington has been much better at mobilizing resources through its federal budget to relaunch demand, and to recapitalize banks where needed. The euro zone has been far more timid, even though aggregate public debt levels haven’t been that different to the U.S. Weaker member states have had no joint fiscal support to rely on.
To Draghi, these problems remain highly relevant. The euro area is facing a new shock as President Donald Trump’s trade conflicts hit local manufacturers and inflation expectations fall to new lows.
At least the ECB president says the central bank is in a position to step in if needed, prompting a Trump Twitter blast on unfair currency manipulation. Draghi’s comments certainly lifted the spirits of the financial markets on Tuesday (traders had been skeptical about whether his earlier dovish signals were credible given his imminent departure). “We are committed, and are not resigned to having a low rate of inflation forever or even for now,” he said.
The reason for the change in market sentiment is that Draghi was more explicit about the tools available to the ECB, ranging from further rate cuts to restarting asset purchases. “The limits we establish on our tools are specific to the contingencies we face,” he said. In other words, any self-imposed restrictions (such as how many bonds of a given country the ECB and national central banks can buy) can be relaxed if needed.
Still, there are understandable doubts about whether his successor will see things the same way. And that’s why Draghi’s point about the euro zone’s political leaders needing to do their bit is so important. He’s unquestionably right about the need for a serious centralized budget.
Ideally, the euro area would move toward a joint fund worth a few percentage points of the bloc’s gross domestic product. That would help stimulate troubled economies with a high debt burden. It’s far better than relying on fiscally prudent countries such as Germany to boost their economies and just praying that some of the money will spill over to weaker states.
Unfortunately, the finance ministers have managed only to agree a much less ambitious fund, aimed at helping member states to boost their competitiveness by funding infrastructure and reforms. The European Union already has similar instruments. Neither is it clear where the money for the new budget will come from and how it will be administered. It would make no sense if the funds were distributed based on the contributions of individual countries. This money should go to countries with the greatest need, though the more fiscally conservative governments are skeptical.
The euro zone has a history of only making big institutional changes during a crisis. So it’s possible that a common budget worth its name will only happen after the next cataclysm. As Draghi comes close to the end of his mandate, his frustration on this subject is tangible. The ECB famously promised to do “whatever it takes” to save the euro, raise inflation and boost the economy. But it can only do “whatever it can.”
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Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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